March 26, 2020

The $2 trillion coronavirus relief package is being held up because Republicans don't want to approve a provision giving unemployed workers $600 per week over and above their state unemployment benefits. This might actually give some workers more money per week than they were actually making when they were employed. Also gig workers such as me would be eligible for these benefits which makes Republicans absolutely apoplectic. My California unemployment benefits would be about $230 so $600. more would make my weekly take home $830 considerably more than what I usually make working about 30 hours a week. Republicans think this would be a total travesty of the free market system. But they miss the point.

What is necessary for the economy to keep working is for people to go out and spend money since consumption is 70% of GDP. Neel Kashkari, who was in charge of the $700 billion TARP bailout during the 2008 financial crisis said that the country would have been better off if the government had been "much more generous" to all homeowners, no matter how deserving they were. Instead, the country was overly generous to Wall Street banks no matter how undeserving they were. And that's just the crux of the matter. To keep the economy functioning the government has to be overly generous to average people who will go out and spend their money which contributes to the 70% consumption economy. The TARP program was supposed to help homeowners with their mortgages as well as the banks. It helped the banks, but fell far short of helping the homeowners.

"Tim [Geithner] thought he was smart enough to have it both ways; that he could protect the bank executives and stockholders and get the same result when they actually restructure the banks," Silvers told The Week. "And he was wrong." That choice also goes a long way towards explaining why, even though the crisis in the financial system itself passed rather quickly, the massive collapse in employment took 10 grinding years to repair. It's why 10 million American families lost their homes, and why, almost a decade later, the bank bailouts remain a source of simmering rage, nihilism, and distrust among voters.

"It was an extremely costly mistake," Silvers concluded. "In terms of homeownership, jobs, small businesses, and perhaps most of all the American people's trust in their government."

The Home Affordable Mortgage Program (HAMP), which was a major part of TARP, was designed to keep 4 million homeowners out of foreclosure. However, only about 1.6 million people were helped. The failure was not for lack of funding. Hundreds of billions of dollars was available and could have gone directly to help struggling homeowners who were being driven out of their homes, but “Treasury just sat on that money and didn’t do it,” Inspector General for the Troubled Asset Relief Program Neil Barofsky said.

So with that experience and that knowledge in mind, Democrats in Congress don't want to repeat the same mistake. They want money in the hands of the American people who will go out and spend it. Poorer Americans are more likely to spend any relief package given to them, and, if they end up getting more per week in unemployment benefits than they were making at their job, so much the better. The banks are already fully capitalized. Losing no time the Federal Reserve has already given $1.5 trillion to the banks and lowered interest rates to zero.

March 21, 2020

The Federal Reserve's Role is to Bail Out Wall Street, Not the American People

by John Lawrence, March 21, 2020

The purpose of the Federal Reserve is to bail out the banks, not to bail out you. During the Great Recession of 2008, the Fed gave trillions to the banks. The average Joe that couldn't pay his mortgage lost his home to foreclosure. Banks only keep a portion of their money as reserves. They create loans out of thin air. If someone can't make payments on a loan, the bank will foreclose. If the loan is secured by property, that property will become the bank's property. If at the same time more people want to take their deposits out of the bank than the bank has in reserves, the bank is in trouble. That's where the Federal Reserve comes in. It floods the bank with liquidity meaning the cash to pay out to the bank's customers who want their money back. At the same time the Fed may take the bank's non performing loans onto its balance sheet. No one cares if the Fed has a bunch of non performing loans on its balance sheet. They can just stay there ad infinitum.

What happened during the Great Recession was that, thanks to financial instruments called derivatives, banks were liable for a lot more money than simple mortgages and other retail loans. They had committed to covering bets like interest rate swaps or collateralized debt obligations (CDOs) without understanding the liabilities they had agreed to. Derivatives represent gambles. A hedge fund will bet that an underlying security will go up or go down. When they win their bets, as they did in 2008, mainly due to foreclosures, it is similar to a run on the bank only a lot more money is at stake. Certain banks and financial institutions did not have the money to pay off the bet. So the Fed stepped in and paid off the bet for them. This was how the financial crisis was resolved. All the gamblers were made whole by the Federal Reserve. All the bets were paid off and very few financial institutions had to go out of business. Lehman Brothers was one institution that did go bankrupt and was liquidated.

The Fed can control how much money is sloshing around in the economy by raising or lowering the prime interest rate. That's the interest rate a bank pays to borrow money. The bank then charges the average Joe a lot higher interest rate, and they make money on the spread. Obviously, the Fed doesn't want the retail banks to make foolish loans that won't be paid back because then it will have to bail out the banks that made such loans. However, this is exactly what led to the 2008 financial crisis. The banks were making "liar loans" base on stated income. A waitress could go into the bank and just state her income was $125,000. a year. There was no checking. She was given a mortgage to buy a house. Then, when she couldn't make the payments on the house, the bank foreclosed. When the bank couldn't resell the house and get its money back, the bank's reserves were diminished and finally it couldn't meet its obligations. That's when the Fed stepped in with more liquidity. The Fed just created money out of thin air the same way the banks created money for loans, and flooded the banking system with it.

Average people lost their homes and their jobs, but investors and gamblers who had bet that the economy would collapse were paid off. This is the solution that Obama oversaw that was created by his protege Tim Geithner, Obama's Secretary of the Treasury. Now the question might be asked why the gamblers who had bet that the economy would fail were paid in full because the Federal Reserve created the money out of thin air to pay them while there was no money created to bail out the American people who had lost their homes and their jobs. Why was their no money created to alleviate the suffering? That's because that's not the Fed's job. The Fed's job is to bail out the banks. Hedge fund manager John Paulson made an estimated $2.5 billion during the crisis by betting against the housing market.

It doesn't take a genius to see that the US might have better spent its money by more widely distributing the trillions that the Fed created rather than paying off a hedge fund manager to the tune of a couple billion dollars, but again that's not the Fed's job. It should have been Obama's job to step in and demand that investor/gamblers not be paid, and that the Fed's trillions of dollars that it created go to the average John and Jayne that lost everything. But that's not how things work in the US capitalist economy. The Fed is not beholden to the American people. It's only beholden to the banks, and even there, it can decide which ones it wants to fail (Lehman Bros.) and which ones it wants to bail out (every other bank).

The trillions of dollars created by the Federal Reserve in its Quantitative Easing (QE) program go directly into the hands of investors meaning rich people. This does not "trickle down" to the American public. So it's no mystery why economic inequality is increasing, why the rich are getting richer and the poor are getting poorer. Much is made about how the Federal Reserve is "independent" from the Federal government. That's because it is a privately owned, wholly owned subsidiary of the big banks. It is literally owned by Wall Street and it's only beholden to Wall Street. It only serves the American public in the sense that it keeps the financial system operating smoothly supposedly.

Consider the alternative. A public bank, one beholden to the American people or its representatives, would have been able to direct the money flow at least partially to the direct alleviation of suffering of the American people during a recession or a depression. The Reconstruction Finance Corporation served the role during the Great Depression of getting money directly to state and local governments and to the American people. It supported banks as well, but the monies also flowed directly into the economy without having to take the form of loans created by the Wall Street banks. It was more hands on in bailing out certain industries.

A public bank, such as exists in North Dakota, can make loans directly to people and small businesses. It doesn't deal in fancy derivatives and is accountable not to the banking system but to the people in general. In North Dakota's case it's accountable to the people of North Dakota to whom it returns its profits. The Central Bank of the United States could be a public bank on the national level which would replace the Federal Reserve with the mandate of supporting the American people directly as well as the banking structure. It would not deal in derivatives which only benefit hedge funds and drive inequality.

The coronavirus could induce another Great Depression depending on how long it lasts. However, don't expect the Federal Reserve to protect the American people although it will protect Wall Street. No investor/gambler need fear losing their money. In fact the John Paulsons of the world, who have probably already taken out fantastic bets that the economy will go down, stand to make billions supplied of course by the Federal Reserve which will create the money out of thin air. This sloshing around of money will be scooped up by the billionaire class. Then the Federal government will come through on the fiscal side to supply aid of some sort to the American people while adding all this money to the national debt.

May 06, 2016

It's deja vu all over again as Yogi Berra would say. Another country that went down the road of debt accumulation just to pay for essential public services. Since Puerto Ricans are born American citizens, you'd think that Puerto Rico could just declare bankruptcy as Detroit, Birmingham and San Bernardino did. But no, US law forbids that. On May 2, a bond payment of $422 million was missed, and a $2 billion payment comes due in July. There's no way Puerto Rico can pay. Puerto Rico is begging Congress for debt relief. But no debt relief is in sight. Here are the facts: Puerto Rico is $70 billion in debt. 45% of the people live in poverty. The unemployment rate is over 12%.

Angry graffiti scrawled across the brightly colored buildings of San Juan tells the creditors of the world exactly where they can stick their plan to extract roughly $73 billion in debt from the struggling U.S. territory. “Puerto Rico comes first. To hell with the debt,” reads one wall. “Don’t play around with my retirement,” says the side of a major freeway. Down by the University of Puerto Rico, the walls and sidewalk are filled with laments — “Look into my unemployed face” — and calls to action: “Study and fight!”

Depending who you ask in Puerto Rico, the debt crisis was caused by neo-colonial and imperialist policies from the U.S., the Puerto Rican government’s wasteful overspending and corruption, or the cadre of hedge funds that are currently profiting from the island’s woes. Add to that toxic mix a series of free-trade agreements that triggered mass outsourcing, and a population in rapid decline due to out-migration, and you arrive where we are today, with the government on the hook for tens of billions of dollars.

Unlike Greeks, Puerto Ricans have an out - simply pack up and leave for the United States. They're American citizens after all. And that's just what they're doing - in droves. Doctors are leaving at the rate of one per day. Meanwhile, vulture hedge funds are buying up Puerto Rican debt at fire sale prices. Like Paul Singer did in Argentina, they will then demand repayment at full face value.

Meanwhile, unemployment skyrockets and and almost half of the remaining islanders are living in poverty. How did it get this way? As usual the US Congress and tax policy are at fault. As a result of a 1976 tax reform, US pharmaceutical companies enjoyed a tax holiday on Puerto Rican corporate income and paid virtually no property taxes. Under this law, U.S. companies also received 100% exemption from municipal taxes in Puerto Rico, and pharmaceutical companies qualified for a special 5% payroll deduction. Corporations which located in Puerto Rico didn't have to pay taxes to repatriate their profits as they do when profits are made in other countries.

Congress Made Puerto Rico an Offer It Couldn't Refuse, Then Reneged

With the help of US tax incentives the pharmaceutical industry accounted for as much as a quarter of the island's gross domestic product with $36.5 billion in annual exports in 2007.

By the mid 1990s, critics led by Texas Representative Bill Archer, then the Republican chairman of the House Ways and Means Committee, attacked the break as too expensive, costing the U.S. about $3 billion a year. In some industries, the tax subsidy was costing the U.S. as much as $72,000 per job, according to a study by the federal agency now called the Government Accountability Office. After a lobbying battle in 1996, the tax break was repealed, with a 10-year transition period for companies already benefiting from the credit.

After making tax policy such that many businesses, especially pharmaceutical firms were attracted to the island, tax policy was reversed and they all moved out. In 1996 a section of the US Internal Revenue Code (Section 936), that provided for profits to be repatriated to the US without paying federal taxes, was repealed. Thus the employment base had its legs cut out from under it. So to keep public services comparable to what they had become accustomed to, the government started to borrow money from Wall Street. Predatory loan sharks that they are, they started making loans to Puerto Rico that they knew they couldn't pay back just like they made mortgage loans prior to the US financial crisis of 2008 that they knew the mortgagees couldn't pay back - liar loans they were called because people taking them out didn't have to show any income. They could say their income was anything with absolutely no bank statements or other paperwork to back it up.

This whole scenario is known as debt deflation that we have written about before. No matter how much money is infused into Puerto Rico to enable it to meet payment deadlines on its bonds, there will never be enough money to pay back its loans because the money is just not there even to meet current expenses. They are insolvent. Throwing good money after bad turns borrowing more into a Ponzi scheme. The only ones who can possibly benefit from this are the hedge funds which will demand that government assets should be privatized and sold off to them in lieu of repayments on the bonds they hold. This is exactly what happened in Greece and Argentina and in Detroit for that matter. Hedge funds said that, if Greece could not repay them when the bonds became due, they would take Greek assets such as the Parthenon and Athens ports and whatever else was a moneymaker.

What happened in Detroit was Disaster Capitalism at its most exemplary. An Emergency Manager was appointed to run the government thus taking "democracy" out of the hands of elected representatives. The same thing will probably happen in Puerto Rico after it's declared insolvent by the bond markets which are all in a dither and all atwitter over Puerto Rico's impending bankruptcy. Oh I forgot, Puerto Rico is not allowed to go bankrupt; that makes the situation even worse. Valuable assets will then just be extracted as Puerto Ricans either exit the island or fall on their knees and beg the bond markets for mercy.

The hedge funds may have more success in this strategy of asset seizing in Puerto Rico than they had in Greece because Puerto Rico is at the mercy of US lawmakers. Greece was not. The US Congress can just turn over Puerto Rican assets to rich investors, and they will take the good parts while leaving the rest to rot including the people who will not have the capability of reaching the mainland - the 45% in poverty.

Bond Markets Structure Who Gets Paid First and Who Waits in Line

The bond markets are wising up though. The all important structuring of who gets paid first and who has to stand in line is being given more attention these days. Before the predatory loan making process proceeds, the recipient has to agree that bond holders will be paid back first even before essential services are provided. Puerto Rico is safe for now because the payments that are due immediately don't have this provision so the government of Puerto Rico can and has made the decision to use what meager funds are at its disposal to pay for essential services and tell the bond holders to take a hike. That will not always be the case especially for future non-heeders of this cautionary tale. In the future bonds are structured in such a way that they must be paid back even before essential public services such as drinking water and hospitals can be paid for. This is from the New York Times:

But the bigger issue may be that second, larger debt bill due in July, roughly $800 million of which is constitutionally guaranteed, giving the payment of it legal priority even over the funding of essential public services, such as police patrols, ambulances or drinking water. Investors who hold the guaranteed debt say they are prepared to fight to enforce their legal rights, no matter how much it may shock and anger the island’s residents.

The cycle leading to the private accumulation of wealth by billionaire hedge fund owners has now become a well worn path: predatory lending followed by insolvency of the debt, followed by the installation of a non-democratically elected Emergency Manager, followed by privatization of assets followed by the destruction of public services followed by the destruction of government itself, the proverbial drowning in the bathtub. Thus all Puerto Ricans will have to eventually pay private corporations for drinking water, electricity, hospitals, education, roads and various other services that are now primarily supplied as public rights throughout the world. And workers will be at the mercy of no-unions-allowed private employers.

There are several wrinkles to the Puerto Rico debacle that make its situation somewhat unique. Before bondholders and hedge funds got wise and demanded that they be repaid for their bonds even before essential services could be paid for (the structuring we mentioned earlier that sets up the order in which debts are to be repaid), hundreds of millions in bonds were bought from a Government Development Bank that resold them to Puerto Rican pension funds. So a default on those bonds would mean the bondholders would actually lose their money instead of being first in line to reclaim it.

Despite the power and importance of the Government Development Bank, its debts are not backed by any taxing power or constitutional guarantee. If it defaults on the looming $422 million payment, its creditors have little legal recourse. And much of the bank’s debt, in the form of municipal bonds, is held by more than 100 credit unions on the island — financial institutions that tend to serve mom-and-pop savers in Puerto Rico’s poor and remote communities.

“The island’s credit unions represent the nest egg of nearly 1,000,000 Puerto Rican families (one of every four Puerto Ricans) that trust their livelihood and savings in these financial institutions,” said the credit unions’ primary regulator in a statement released last year, when the sector held Government Development Bank debt with a face value of slightly more than $500 million, according to regulatory records. The regulator’s spokesman did not answer messages Thursday.

Historically, the credit unions were required to invest only in very safe assets. But in 2009 their regulators made an exception, allowing them to buy and hold riskier bonds, as long as the bonds were issued by some branch of the Puerto Rican government. The change gave the Government Development Bank a new way to raise money, by selling its bonds to the credit unions.

So what else is new? It always boils down to seizing the assets of a pension fund to pay current bills or to bolster hedge fund profits. Meanwhile average Puerto Ricans (if there are any left) suffer. Financial maneuvering and shenanigans abound, the result of which is always to make the rich richer and make beggars out of the poor.This is what the financialization of the economy has wrought. Puerto Rico has already removed assets from its workers’ compensation pool and public pension system to pay bills, taken cash from low-priority bonds to make payments due on high-priority bonds, and extended a highway privatization, giving up future toll revenue (as Chicago did) in exchange for upfront payments of $115 million. So Puerto Rico is well on its way to becoming a private corporate owned haven for rich capitalists, a wholly owned subsidiary of the rich, who will profit from the booming tourist industry by building huge developments - hotels, condos and casinos which cater to the leisure travel class and the uber wealthy in this island paradise (for the rich).

August 10, 2013

Housing justice advocates hopeful about innovative Richmond plan to use public seizure laws to save underwater homes from foreclosure

- Sarah Lazare, staff writer

Underwater Homeowners Press Conference in front of Richmond City Hall (Photo: ACCE)Using the authority of state government to actually help people has Wall Street bankers in a panic, spurring threats of aggressive legal retaliation against the town of Richmond, California simply for trying to help some of its struggling homeowners.

'Eminent domain' has long been a dirty term for housing justice advocates who have seen municipalities invoke public seizure laws to displace residents and communities to make way for highways, shopping malls, and other big dollar projects.

But in Richmond, city officials are using eminent domain to force big banks to stop foreclosing on people's homes in an innovative new strategy known as 'Principle Reduction' aimed at addressing California's burgeoning housing crisis.

Richmond became the first California city last week to move forward on a plan that has been floated by other California municipalities to ask big bank lenders to sell underwater mortgage loans at a discount to the city (if the owner consents), and seize those homes through eminent domain if the banks refuse. The city has committed to refinancing these homes for owners at their current value, not what is owed.

City officials launched this process by sending letters in late July to 32 banks and other mortgage owners offering to buy 624 underwater mortgages at the price the homes are worth, not what the owners owe.

"After years of waiting on the banks to offer up a more comprehensive fix or the federal government, we're stepping into the void to make it happen ourselves," Mayor Gayle McLaughlin said in late July.

Wall Street is furious at the plan and has vowed to sue the municipality, a threat that did not stop Richmond but did slow other California cities in adopting the strategy.

Big banks have been slammed for their damaging mortgage loan policies that target poor and working class people and communities of color with high risk loans, policies that have had a profound impact on Richmond, which has large latino, African American, and low-income communities.

Eminent domain laws also have a painful history in Richmond, but housing justice advocates are hopeful about this new twist on the seizure law.

"For years we have seen cases where eminent domain was used in a harmful way, and it really hurts low-income communities of color," David Sharples, local director for Contra Costa Alliance of Californians for Community Empowerment, told Common Dreams. "People here in Richmond talk about when they built the big 580 Freeway, and people had their houses taken and were displaced."

"But we see this as a way eminent domain is finally being used to help keep families in their homes," he added. "It is finally a way for it to be used in a good way."

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August 03, 2013

An American era of eviction and destruction

We cautiously ascend the staircase, the pitch black of the boarded-up house pierced only by my companion’s tiny circle of light. At the top of the landing, the flashlight beam dances in a corner as Quafin, who offered only her first name, points out the furnace. She is giddy; this house -- unlike most of the other bank-owned buildings on the block -- isn’t completely uninhabitable.

It had been vacated, sealed, and winterized in June 2010, according to a notice on the wall posted by BAC Field Services Corporation, a division of Bank of America. It warned: “entry by unauthorized persons is strictly prohibited.” But Bank of America has clearly forgotten about the house and its requirement to provide the “maintenance and security” that would ensure the property could soon be reoccupied. The basement door is ajar, the plumbing has been torn out of the walls, and the carpet is stained with water. The last family to live here bought the home for $175,000 in 2002; eight years later, the bank claimed an improbable $286,100 in past-due balances and repossessed it.

It’s May 2012 and we’re in Woodlawn, a largely African American neighborhood on the South Side of Chicago. The crew Quafin is a part of dubbed themselves the HIT Squad, short for Housing Identification and Target. Their goal is to map blighted, bank-owned homes with overdue property taxes and neighbors angry enough about the destruction of their neighborhood to consider supporting a plan to repossess on the repossessors.

“Anything I can do,” one woman tells the group after being briefed on its plan to rehab bank-owned homes and move in families without houses. She points across the street to a sagging, boarded-up place adorned with aworn banner -- “Grandma’s House Child Care: Register Now!” -- and a disconnected number. There are 20 banked-owned homes like it in a five-block radius. Records showed that at least five of them were years past due on their property taxes.

Where exterior walls once were, some houses sport charred holes from fires lit by people trying to stay warm. In 2011, two Chicago firefighters died trying to extinguish such a fire at a vacant foreclosed building. Now, houses across the South Side are pockmarked with red Xs, indicating places the fire department believes to be structurally unsound. In other states -- Wisconsin, Minnesota, and New York, to name recent examples -- foreclosed houses have taken to exploding after bank contractors forgot to turn off the gas.

Most of the occupied homes in the neighborhood we’re visiting display small signs: “Don’t shoot,” they read in lettering superimposed on a child’s face, “I want to grow up.” On the bank-owned houses, such signs have been replaced by heavy-duty steel window guards. (“We work with all types of servicers, receivers, property management, and bank asset managers, enabling you to quickly and easily secure your building so you can move on,” boasts Door and Window Guard Systems, a leading company in the burgeoning “building security industry.”)

The dangerous houses are the ones left unsecured, littered with trash and empty Cobra vodka bottles. We approach one that reeks of rancid tuna fish and attempt to push open the basement door, held closed only by a flimsy wire. The next-door neighbor, returning home, asks: “Did you know they killed someone in that backyard just this morning?”

The Equivalent of the Population of Michigan Foreclosed

Since 2007, the foreclosure crisis has displaced at least 10 million people from more than four million homes across the country. Families have been evicted from colonials and bungalows, A-frames and two-family brownstones, trailers and ranches, apartment buildings and the prefabricated cookie-cutters that sprang up after World War II. The displaced are young and old, rich and poor, and of every race, ethnicity, and religion. They add up to approximately the entire population of Michigan.

However, African American neighborhoods were targeted more aggressively than others for the sort of predatory loans that led to mass evictions after the economic meltdown of 2007-2008. At the height of the rapacious lending boom, nearly 50% of all loans given to African American families were deemed “subprime.” The New York Timesdescribed these contracts as “a financial time-bomb.”

Over the last year and a half, I traveled through many of these neighborhoods, reporting on the grassroots movements of resistance to foreclosure and displacement that have been springing up in the wake of the explosion. These community efforts have proven creative, inspiring, and often effective -- but in too many cities and towns, the landscape that forms the backdrop to such a movement of hope is one of almost overwhelming destruction. Lots filled with “Cheap Bank-Owned!” trailers line highways. Cities hire contractors dubbed “Blackwater Bailiffs” to keep pace with the dizzying eviction rate.

In recent years, the foreclosure crisis has been turning many African American communities into conflict zones, torn between a market hell-bent on commodifying life itself and communities organizing to protect their neighborhoods. The more I ventured into such areas, the more I came to realize that the clash of values going on isn’t just theoretical or metaphorical.

“Internal displacement causes conflict,” explained J.R. Fleming, the chairman of the Chicago Anti-Eviction Campaign. “And there’s no other country in the world that would force so much internal displacement and pretend that it’s something else.”

July 13, 2013

Banks are outbidding private equity Funds at foreclosures, believing they can beat them at the pump-and-dump game.

Photo Credit: Shutterstock.com

It’s conventional to deem local journalism to be dead, but Josh Salman at the Sarasota Herald-Tribune has written well-researched investigative story on bank bidding at foreclosures in his neck of the woods, Big lenders bidding to keep homes, that has national implications.

Here’s the overview:

Banking giants from Wells Fargo to Fannie Mae are routinely paying top dollar on the auction steps to hold onto their own distressed properties, outbidding cash offers and paying well above assessed value, according to a review of thousands of Southwest Florida auction purchases.

They are speculating that the properties will appreciate even more in the next couple of years.

The article does not indicate whether the “banking giants” like Wells Fargo are only bidding on properties where the bank owns the loan or serviced loan for private label (non-Fannie and Freddie investors). We’ll assume only the former.

The degree of outbidding is not modest, at least in Southwest Florida (emphasis ours):

In some cases, lenders this year have bid up to 600 percent more than a property’s worth to retain foreclosures — one of the primary reasons the acquisition costs for competing real estate investors also has spiked in recent months.

In the 12 months ending June 1, 4,865 foreclosures were auctioned in Sarasota and Manatee counties. Lenders outbid third-parties to keep 3,754, or 77 percent.

Banks paid $259.2 million for the properties, an increase of 34 percent from the amount they spent in the same 12-month period a year ago…

“The banks seem to be offering more than they usually would — going for market value and above,” said Shannon Moore, broker and owner of Green Lion Realty in North Port. “I don’t quite understand the logic. It’s a vast shift from the last few years when would take any reasonable amount just to get rid of them.”

Now it’s worth keeping in mind that in the good old fashioned days, when homeowners had equity in the home at the time of purchase and prevailing home prices went down only at most on a regional basis, and then usually not too much, the bank would put in a bid for the home at the courthouse for the value of the mortgage so it would take it into “real estate owned” inventory and dispose of it later if no one was willing to snap it up on the courthouse steps for a high enough price. But analysts would probe banks about their REO inventories, particularly in a weak economy.

But the “paid” is a misnomer unless the bank bid above the mortgage balance to win at the auction, which the article says doesn’t happen that often. So from an accounting standpoint if the mortgage was $160,000 and the highest third party bid was $90,000, the bank could take the offer at $90,000 and recognize a loss of $70,000 plus foreclosure costs. Or it can bid $110,000 and move the property into REO. If I read the OCC guidance correctly, the bank has to value the REO at the lower of the “recorded investment in the loan satisfied” which I assume is the mortgage balance PLUS the foreclosure costs OR fair market value as determined by an appraiser. Gee, we know how independent those appraisers are!

And with appraisers relying on recent sales for valuations….you can see the logic of the bank overbidding on such a grand scale. They can bid up to the mortgage balance and not increase their loss exposure. Overbidding systematically increases the comparable sale prices appraisers will look at to prepare their valuations. And with the banks accounting for 77% of purchases out of foreclosure sales (and foreclosure sales representing 20% to 30% of all sales in these counties), the bank activity can influence appraisals, particularly since one might expect foreclosure sales to be concentrated in certain neighborhoods. And it’s even great enough at 15% to 23% of all sales to move overall price averages and trends.

It’s also important to not to dismiss this as “oh, this is just two counties in Florida.” Large banks are not set up to have local offices operate with discretion and go load up on real estate because the manager thinks it is a hot time to buy. This is clearly a policy decision at work, and the policy decision appears to be to “outbid” the private equity giant Blackstone:

Most industry analysts attribute the change in direction to the so-called “Blackstone effect.”

The infusion of capital from the giant New York-based hedge fund and several others like it has boosted home values and tightened supply since Blackstone began buying single-family investment homes in Southwest Florida last fall.

Coupled with pent-up demand from baby boomers, and conditions that make it difficult for many boom-time purchasers to list a home for sale, banks can hold onto distressed houses with less long-term risk.

“Why sell for pennies on the dollar to Blackstone, when they can do it themselves now,” Adamaitis said. “Blackstone set the market, and now banks are taking advantage of the opportunity. They now have all of the top variables to control the market.”

The idea is that the banks would turn down bids at auction — presumably from a local flipper or investor — to instead list the property on public Realtor databases, where it can draw higher offers from owner-occupiers.

The lenders hope to mitigate their losses on their bad loan by cutting out the middleman and waiting for prices to increase.

So we can expect to see similar behavior (which amounts to holding inventory off the market through bidding it back in at the courthouse) in markets with high PE fund activity. Readers can hopefully add to this list, but aside from big chunks of Florida, it includes Las Vegas, Phoenix, and Atlanta.

Needless to say, there are a lot of risks to this strategy. The first is that even in the Sarasota-Manatee market, with supposedly tight inventories, banks are only getting hit and miss results with this “let’s beat the speculators at their game” idea. Trying to best PE funds (whose exit is not typically a sale to an end user, but a rental income stream and an IPO of the rental company) isn’t necessarily smart, particularly if you are using Blackstone as your benchmark. That fund is the “buy Microsoft” of the private equity world. They can get away with mediocre investment performance due to the strength of their brand name. In the last real estate cycle, they famously bid for Sam Zell’s Equity Office Trust in February 2007, which was seen at the time and proved to be a peak of market buy.

By contrast, savvy real estate operator and early rental market entrant Carrington said more than a month ago that they had stopped buying homes altogether because dumb money was ruining the market, as in overbidding. From Bloomberg:

“We just don’t see the returns there that are adequate to incentivize us to continue to invest,” Rose, 55, chief executive officer of Carrington Holding Co. LLC, said in an interview at his Aliso Viejo, California office. “There’s a lot of — bluntly — stupid money that jumped into the trade without any infrastructure, without any real capabilities and a kind of build-it-as-you-go mentality that we think is somewhat irresponsible.”

The second issue that is if the banks don’t find buyers for these speculative purchases fairly quickly, the homes often deteriorate. Even though the strategy (in many cases) is premised on holding the property for a year or two to catch a rising market, that assumes the banks do a decent job of securing and maintaining the properties. Their track record is that they often don’t. Conversely, unlike the banks, the PE funds don’t lease out the properties as is. They all expect to at least spruce them up a bit; some even hunt for ones that need particularly types of upgrades that they’ve set out to do in a standardized way (same toilets, vanities, etc; they’ll bid with their upgrade in mind, meaning if their typical bathroom rehab won’t work, they won’t make the offer).

Third is the look like the banks are about to have the Fed wreck their clever plan of unloading homes later to real economy buyers at a better price. Thanks to the not-so-bad job numbers last Friday leading Mr. Market to up his odds of the Fed tapering QE sooner rather than later, 30 year mortgage rates are now 4.64% for a 30 year fixed rate mortgage, up from 3.25-3.30% in early May. And realtors say the decrease in buying power is even greater, since the FHA was giving a two point lender credit to help pay for closing costs. One mortgage broker pegged the apples-to-apples rate rise at 1.75% before the additional ratchet up at the end of last week, which Mortgage News called Among The Worst Days in Mortgage Rate History. And even though rates are low by historical standards, don’t kid yourself as to what this rate rise will do to the nascent recovery. From Housing Wire last month:

Fannie Mae Chief Economist Doug Duncan said the concern should be less about what the rates have risen to and more about the speed at which they are rising.

Duncan noted that in 1994, for instance, rates rose 2% over a 12-month period, resulting in a huge impact on home prices, which fell significantly.

“If the rise happens rapidly, it tends to have an impact,” said Duncan, who added that once rates rise 100 basis points, home sales may begin to slow.

Oh, but not only are banks likely to find themselves to have been too clever by half, but as usual, their cute fixation on their own accounting and profit fantasies is yet again hurting borrowers and leading them to skirt commitments made during those “get out of liability almost free” exercises otherwise known as mortgage settlements. Again from Salman:

The national mortgage settlement also was aimed at encouraging more short sales, loan modifications or deeds-in-lieu of foreclosure — all less bruising methods of disposing of distressed properties. Those processes have a smaller impact on a borrower’s credit and are generally thought to be less hazardous for the overall economy….

With banks now aggressively pursuing home seizures on auction again, some worry it will ultimately limit the envisioned impact of the mortgage settlement, especially if lenders believe they can command more for a bank-owned listing in six months than they can for a short sale today.

This approach might not seem as wishful as it is if the banks didn’t have even more foreclosures in the pipeline, a total of 15,000 in Sarasota, Manatee, plus DeSoto counties. Contrast that with the 1,300 houses sold to third parties in Sarasota and Manatee counties in the past 12 months. And remember, on top of that, many of those third parties were flippers or rental investors, not traditional home-buyers.

But aside from the banks’ questionable motivation, we also have Fannie’s and Freddie’s pursuit of the same strategy. Perhaps they are taking (bad) guidance from their servicers. But this may also be a way to max out GSE assets within the conservatorship guidelines. Remember, the GSEs are required to shrink their balance sheets over time. But the flip side is executive pay is based on the size and complexity of the organization plus apparent performance and the GSEs continue to peg their compensation at private sector levels. So keeping Fannie and Freddie as big as allowable and where possible, dressing up its accounts is also the path of increasing the pay of its top brass.

The most disconcerting aspect of the article was the confidence of some observers in the banks’ ability to manipulate prices. Or maybe not. As Abigail Field said via e-mail, “There’s so much bid rigging among bankers that it would be weird if there wasn’t bid rigging.”

But how successful are you, really, if you have more than an order of magnitude more product in the pipeline than you unloaded to third parties last year, and many of those are speculators who are already starting to withdraw from the game? The last time banks were all over virtually all sides of the market was in CDOs, where they had less than third-party relationships with collateral managers who were major buyers (they funded them!) and wound up with tons of inventory, either because they had badly clogged distribution pipelines or because they gamed their banks’s risk and bonus systems by hedge AAA tranches and generate what turned out to be almost entirely fictive profits. And we know how that move ended. In general, the history of market corners is not a pretty one, and the banks’ and the GSE’s behavior in hot investor markets, if Sarasota and Manatee counties are any guide, looks like a close cousin.

Banks appear not to have heard the old Wall Street saying, “A position is a trade that didn’t work out.” I suspect they are going to be long their REO for a more protracted period than they anticipate. Stay tuned.

Yves Smith is the founder of Naked Capitalism and the author of 'ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.'

April 27, 2013

Banks foreclosed on military service members, homeowners who had been approved for a loan modification and even homeowners who were current on their payments. At least 53 homeowners who weren't behind on their payments were successfully foreclosed on and lost their homes for no reason. There was widespread criminal behavior on the part of the banks, but in a recent settlement they got off relatively cheap. A foreclosure settlement between the government and 13 banks on April 9, 2013 will spread $3.6 billion in cash among millions of borrowers. The consultants who determined how much each homeowner would get and happened to be bank employees will get $2 billion for their efforts.

The cash will be split among 4.2 million borrowers who were in foreclosure in 2009 or 2010 and had home loans serviced by Bank of America, Wells Fargo, JP Morgan Chase, Goldman Sachs, Morgan Stanley, Aurora, Citibank, HSBC, MetLife Bank, PNC, Sovereign, U.S. Bank, and SunTrust.

Close to 1.2 million borrowers, or about 30 percent of the total whose properties were foreclosed on, had to battle potentially wrongful efforts to seize their homes despite not having defaulted on their loans, being protected under a host of federal laws, or having been in good standing under bank-approved plans to either restructure their mortgages or temporarily delay required payments.

Other abuses such as robosigning affected numbers of homeowners. Bank employees were paid to sign thousands of foreclosure documents despite no qualifications for the job in lieu of the banks getting the proper documents from their respective counties which would have cost them money and time. Despite all the criminal and fraudulent activities the banks engaged in related to foreclosures, they have not been prosecuted and have gotten off relatively scot free. Millions of homeowners, however, have not been so fortunate. They have lost their homes to foreclosure despite having done nothing wrong.

The amount of money set aside to compensate those wrongfully foreclosed on was a mere pittance. 234,000 of those had worked out a new payment plan with the banks, but were foreclosed on anyway. This is known as dual tracking where one bank department was trying to foreclose on the home while another department worked out a loan modification. Evidently, the right hand didn't know what the left hand was doing but that would be giving the banks' criminal operations too much credit. Both hands knew what the other one was doing, and they did it in such a way as to stick it to homeowners and make themselves the most profits. After getting the homeowners to keep on paying something on their mortgages, they went ahead and foreclosed on them anyway. That maximized their profits and drew a cheer from Wall Street. After all they do have to report their earnings to Wall Street, and Wall Street frowns when they don't meet their projections but cheers when profits are maximized. It makes investors and shareholders happy, and their charters make it clear that their job above all else is to maximize profits.

The government agency which carried out the so-called Independent Foreclosure Review, whose purpose was to compensate the wrongfully foreclosed upon, is called the Office of the Comptroller of the Currency (OCC). It is an agency that has been completely captured by the bank lobby and considers as its purpose the protection of the banks and not the homeowners. As a result homeowners who had lost their houses to the banks received a mere pittance in return for the experience. The OCC determined that the banks themselves should hire consultants whose job it was to determine how much each homeowner was to be paid after giving each case an independent review. They were paid $250. per hour for their services. This came out of the total amount which was set beforehand to be divided up among the homeowners.

1,099,000 victims of dual tracking actually received $500. each. $500 for being criminally defrauded out of their homes. $500 for being double-crossed, for being led down the garden path thinking they had worked out a payment plan. This was a criminal operation fully participated in by a government agency, the OCC. Another 865,000 were in the process of foreclosure even though they had worked out a loan modification when they were foreclosed on.

Here's What You Can Buy for Having Your Home Stolen: about one hour with an attorney, a couple cases of booze, about ten pitchforks, 4 months rent in Alaska, 2 months rent in a storage facility, 300 boxes of Kleenex or an Apple iPhone.

A homeowner not in default got $125,000. They did nothing wrong. They were current on their payments yet the banks took their homes anyway, illegally I might add. Wrongfully foreclosing on active duty members of the armed forces is a criminal felony, but the banks merely have to pay $5000. For that these lucky bastards could get a a 2 meter dome tent. Nobody has been indicted for these criminal felonies involving active duty service members, but that's nothing new. The banks have been getting away with murder ever since the financial crisis hit in 2008 and Secretary of the Treasury Henry Paulson, former Goldman Sachs CEO, ran around Washington with his hair on fire.

Each of the wrongfully foreclosed on homeowners was supposed to get an individual review of their case, but instead the Federal Reserve and the OCC engineered a mass settlement. They in essence engineered a crime wave and determined that the banks should not have to pay for their misdeeds.

On Chris Hayes show, All In on MSNBC, Eliot Spitzer, former New York state Attorney General said: "The amount of money that was involved in the totality of the settlement ... is less than the Treasury Department gave to Goldman Sachs to cover their exposure to AIG which was $12 billion. Nobody said anything. Goldman just got a check for $12 billion. All the massive and wrongful foreclosures in the country only got two thirds of that. The amount of money is insanely low."

He went on to say that the OCC is the paradigm of a "broken fraudulent regulatory body. It has been in the back pocket of the banks historically." Pre crash in 2003 Eliot Spitzer and the other AGs went to court concerning the subprime scandal. The OCC came in on the side of the banks to stop them. "We had to litigate all the way to the Supreme Court because the OCC was covering for the banks." The OCC opposed mortgage writedowns. The OCC said no we're here to protect the banks not the entirety of the economy."

So this whole operation of redressing the grievances of foreclosed upon homeowners was essentially a sham designed by OCC to wipe away the banks' liabilities in the cheapest possible way. The banks saved billions of dollars in getting this deal. Alexis Goldstein, who also appeared with Spitzer on MSNBC, accused the OCC of outright lying by saying that the banks' dirty, double crossing dealings only affected a small number of homeowners. She said "They were lying when they said there was a 4.2% error rate." In actuality the error rate on the part of the banks was much larger.

Spitzer said: "There was an absolutely grotesque failure to do an appropriate review. The OCC should be eliminated."

The totality of the settlement going to the victims is $3.6 billion while the amount going to the independent auditors who were actually bank employees is $2 billion. If you were paid $500. as your settlement,and a consultant was paid $250. per hour to review your file and then they walked away with $10,000. while you got $500., how would you feel? The widespread practices of deceit, malfeasance and incompetence on the pert of the banks resulted in 4 million homeowners getting $3.6 billion while consultants walked away with $2 billion.

Subsequent to the announcement by the OCC, the banking subcommittee of the US Congress of which Elizabeth Warren is a member, grilled deputy counsel of the OCC, Daniel Stipano. It seems that the OCC has determined that all the proceedings involving the Independent Foreclosure Review will be kept secret. Even the US Congress will not have the right to know what went on in the determination of "awards" given to the aggrieved homeowners. Some open democracy this is! The OCC will keep secret any and all information that the consultants considered. Why did the OCC let the banks hire consultants who were bank employees and whose job it was to examine the banks and determine the amounts of money given to the wrongfully foreclosed. Apparently, Congress and the American people don't have a right to know.

The banks have become to big to fail, too big to prosecute, even too big to exact a meaningful penalty. The premise is that doing any of these things would hurt the entire economy, but, according to David Stockman, Reagan's Budget Director, this is not true. He argues eloquently in a new book, The Great Deformation, that to bring down the big banks would not have hurt the Main Street banks nor the Real Economy at all. The ATMs would not have shut down. Businesses would have received banking services as normal. Yet taxpayers gave $700. billion to the big banks as part of the TARP program and the Federal Reserve ginned up $7 trillion which it dispersed not only to American banks but to banks all over the world. This was just to save the financial casino economy and had nothing to do with the economy that most Americans participate in. The Fed is still at it with Quantitative Easing, printing $85. billion a month and giving it to the big banks to gamble with.

But if you're an average American kicked out of your home, even though you had been paying your mortgage or thought you had worked out a payment plan with the bank, you might just end up with $500.

July 28, 2012

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.A foreclosed home in Miami, Florida. Joe Raedle/Getty Images

But there’s something brewing that looks like it might be a blueprint to effectively take on Wall Street: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can't speak for how well the program will work, but it's certaily been effective in scaring the hell out of Wall Street.

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of "That’s so crazy, it just might work!" One of the plan’s originators described it to me as a "four-bank pool shot."

Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County … are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

I’ve been following this story for months now – I was tipped off that this was coming earlier this past spring – and in the time since I’ve become more convinced the idea might actually work, thanks mainly to the extremely lucky accident that the plan doesn’t require the permission of anyone up in the political Olympus.

Cities and towns won’t need to ask for an act of a bank-subsidized congress to do this, and they won’t need a federal judge to sign off on any settlement. They can just do it. In the Death Star of America’s financial oligarchy, the ability of local governments to use eminent domain to seize toxic debt might be the one structural flaw big enough for the rebel alliance to fly through.

The plan only makes sense in the context of America’s overall economic paralysis. Right now the economy is stuck in a standstill, largely because of the housing bubble. Five or six or ten years ago, when Wall Street was cranking out trillions of dollars of cheap home loans so that they could later be chopped up, pooled, and sold to unsuspecting investors in the form of high-grade securitized bonds, millions of ordinary people jumped on the housing comet, buying big houses for big money.

The problem is, if you bought a house for $300,000 then, it might be worth $200,000 now. When you’re $100,000 in debt, you’re not rushing out to buy washing machines, new cars, new DVD players. As Paul Krugman put it in his column today:

There’s no mystery about the reasons the economic recovery has been so weak. Housing is still depressed in the aftermath of a huge bubble, and consumer demand is being held back by the high levels of household debt that are the legacy of that bubble.

Then there’s the other problem. Even if you manage to keep making your payments on your house, your neighbor might not. Whoever used to live next door has left after a foreclosure: there are squatters building a meth lab in the basement now. Two more houses are being boarded up down the street. So now the value of your house is getting lower and lower every day. No matter how fast you make your payments, your debt situation is still going to be moving in the wrong direction.

Instead of letting everyone be slowly ground into dust under the weight of all of that debt, the idea behind the use of eminent domain is to pull the Band-Aid off all at once.

The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern. MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.

“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we're businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”

Here’s how it works: MRP helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).

Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans.

At that point, the JPA is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.

On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back his own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.

In order to make MRP work, Gluckstern and his partners needed to find local officials with enough stones to try the audacious plan. With so many regions in such desperate straits thanks to the housing mess, that turned out to be not as hard as perhaps might have been expected.

First in line was San Bernardino County in California, not coincidentally located at ground zero of a subprime bubble blown to gigantic proportions by Southern Californian mortgage giants like Countrywide and Long Beach. San Bernardino is more or less a poster child for the mortgage crisis; more than half of its homeowners are underwater on their homes, unemployment is past 12%, and the county recently had to file for bankruptcy.

It’s not surprising, then, that local officials like Acquietta Warren, mayor of the city of Fontana, were receptive to the eminent-domain plan.

“Sooner or later,” Warren told the New York Times, “all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory.”

San Bernardino County officials, along with two of its bigger cities (Fontana and Ontario), have set up the legal mechanisms needed to condemn and seize home loans, but the details of the plan haven’t been completely worked out yet. Still, officials say about 20,000 homeowners in San Bernardino would be eligible for the program; how many will get to use it is unknown.

In the meantime, other counties in other parts of the country are considering the plan. MRP has been courting local officials in Nevada, Florida, and in parts of the Northeast. In New York, officials in Suffolk County on Long Island, where 10% of homes are underwater, are seriously considering the plan.

The role of MRP and the presence of businessmen like Gluckstern in this whole gambit is going to tempt some reporters to pitch this story as a purely financial story, and certainly it does have interest as a business headline.

But MRP’s role aside, this is also a compelling political story with potentially revolutionary consequences. If this gambit actually goes forward, it will inevitably force a powerful response both from Wall Street and from its allies in federal government, setting up a cage-match showdown between lower Manhattan and, well, everywhere else in America. In fact, the first salvoes in that battle have already been fired.

For instance, the Wall Street trade association, SIFMA, this past week issued a denunciation of the eminent domain plan that includes a promise of a legal challenge. “We believe the MRP proposal is unlikely to survive a judicial challenge,” one of SIFMA’s lawyers wrote. Other trade groups are lining up to describe the tactic as illegal or "unconstitutional."

More insidiously, however, SIFMA pledged that its members will not allow future home loans originated in counties that use the eminent domain tactic to participate in something called the To-Be-Announced (TBA) markets for mortgage-backed securities. Explaining this would require a sharp detour into a muck of inside-baseball mortgage terminology, but the long and the short of it is that SIFMA is promising to make it difficult for any community that tries this tactic to obtain private mortgage financing in the future.

Essentially, SIFMA is promising a kind of collusive financial lockout of uncooperative communities. The threat would appear to be a high-handed form of redlining that raises serious antitrust questions, but in a way, that kind of response is to be expected.

Ultimately, the MRP tactic will be a fascinating test case to see exactly how much local self-determination will be allowed by the centralized financial oligarchy and its allies in the federal government.

If through boycotts, collusion, federal pressure and other forms of encirclement, local governments can be stripped of their right to condemn blighted property, we’ll know that the guts have been cut out of the very idea of regional self-rule. It will be fascinating to watch. At the very least, this story has the potential to be the first true open, pitched battle between Wall Street and the homeowners and communities who have been the primary victims of financial corruption.

Tune in for more on this front soon.

Editor's note: Readers interested in learning more about this would do well to read North Carolina congressman Brad Miller's piece on this in American Banker. Miller is not necessarily a proponent of the exact mechanism proposed by MRP, but he is intrigued by the general idea of using eminent domain to address the blighted-loan problem, and seems particularly interested in the strategic possibilities of addressing the problem at the local level. He writes:

The biggest banks have used their political power in Washington to defeat any effort that would effectively reduce foreclosures, such as allowing judicial modification of mortgages in bankruptcy, allowing a federal agency to use eminent domain to buy mortgages, or providing teeth for the chronically ineffective Home Affordable Modification Program, because those efforts would also require the immediate recognition of losses on mortgages.

But Wall Street's power in Washington may be as useless in defeating a proposal in San Bernardino County as strategic nuclear weapons are in fighting an insurgency. No wonder Wall Street is panicked.

Also, here's a piece Miller wrote a couple of years ago in The New Republic suggesting the use of eminent domain through the use of a public vehicle similar to FDR's Home Owners' Loan Corporation, or HOLC.

Again, there's going to be a lot of heated discussion about this, and it's sure to get ugly in the near future. This idea will be portrayed as radical and unrealistic, but in reality it's neither terribly radical nor even all that new. What it is, more than anything else, is uncomfortable. Anyway, more on this to come.

June 30, 2012

As a young twenty something ingenue at JP Morgan Chase, Blythe Masters was the inventor of the Credit Default Swap (CDS), the financial instrument responsible for almost destroying the global financial system in 2008. Warren Buffett called CDSs and other derivatives "financial weapons of mass destruction." But exactly what are CDSs and how did they function to almost bring down the entire global banking system? CDSs came about from JP Morgan Chase, Goldman Sachs and other large banks' desire to offload risk and thereby strengthen their balance sheets. They would then be in a position to do more deals due to the fact that they would not have to keep so much collateral on their books to back up their deals. If a loan or bet went south, someone else would be responsible for paying off on the insurance policy, not them. Thus they could increase their profits by doing more and more trades without having to worry about paying off on any of them if anything went awry. That would be some other institution's responsibility. A CDS was an insurance policy. Furthermore, you wouldn't even have to be directly involved as a party or counterparty. You could purchase a "naked" CDS. This is like betting on a horse that you don't own and have no financial stake in or responsibility for.

When the big banks entered the subprime loan market, their problem was "how do we get the rating agencies such as Moody's and Standard and Poor's to rate these securities as anything other than trash and make them more attractive to investors?" First, the subprime loans were bundled together and securitized creating Collateralized Debt Obligations (CDOs). Then they were sold off in tranches (slices) to investors. Blythe Masters' invention circa 1996 enabled them to be rated AAA. How they did it was this. The rating agencies might want to have rated the CDOs BBB or CCC, but the banks said to them "How about if we throw in some insurance that these mortgages won't default? Will that raise the credit rating of this worthless junk?" Sure enough the rating agencies said. So part of the package became a CDS which effectively guaranteed the CDO and got it rated AAA. Investors ate up the product never bothering to look at the underlying worthless mortgages. A AAA rating was good enough for them. After all how could they go wrong with a AAA rated investment product? Then as soon as the deal was done, JP Morgan Chase traded off the CDS to someone else like AIG, for instance. No regulator or anyone else ever bothered to ask if AIG had the assets to back up the risk it had taken on and JP Morgan was free to go on and make other trades and deals since the need to back up any of these deals had just been transferred to some other institution. Without a lot of risk weighing down their balance sheets the big banks were free to make more deals, more trades and higher profits.

Insurance companies are the most highly regulated companies on the planet since it is important to know that an insurance company has the assets to back up the policies it writes. However, no one bothered to check if CDSs, which are essentially insurance products, were backed up by anything and this is what in a nutshell caused the financial deluge of 2008. And the regulatory atmosphere during the Bush administration was that no regulation was good regulation. When subprime mortgages went belly up, the investors tried to redeem their CDSs only to find out that the institutions who had pledged to make them whole didn't have the assets to do so. This is what caused Bear Stearns to throw itself at Tim Geithner's and Ben Bernanke's feet in March of 2008 and beg for mercy. They engineered a takeover of Bear by JP Morgan Chase and to sweeten the deal they gave JP Morgan $30 billion. So they said in effect 'here take $30 billion and Bear Stearns and problem solved'. But the problem was not solved. Treasury Secretary Henry Paulson, a free market guy, was upset that Bear wasn't allowed to go bankrupt because of 'moral hazard'. He thought that banks that had gotten themselves in trouble shouldn't come begging to the government to save them. Moral hazard meant that you had to suffer the consequences of your own decisions even if that meant going bankrupt. You couldn't expect the government to bail you out. Unfortunately, this concept ended up being applied more to average citizens than to the big financial institutions.

What happened next was that Lehman, which also had a large portfolio of CDSs came crying to the government. Paulson said, "No bailout. You guys are on your own." and Lehman promptly went bankrupt. But the dominoes did not stop falling there. AIG had a humungus portfolio of CDSs with not a prayer of a chance of backing them up. The dominoes were falling and the regulators in the government had hardly a clue as to what was happening. Why didn't they know anything or have a plan for dealing with the ensuing catastrophe? Because the CDS market was a dark market. They weren't traded on an exchange. Each deal was a private deal between a party and a counterparty with no one else having a clue as to what was going on. Thus trillions of CDSs accumulated on the books of financial institutions without anyone knowing the total amount or whether or not the institutions were in a position to pay them off if need be.

Here's an example of a dark market. Say you're selling a used car. You'd like to get as much as you can for it and your counterparty would like to pay the least. You, being a used car dealer, and your counterparty being an unsophisticated rube, who do you think is going to get the better end of the deal? The dealer of course. Before the era of Kelly's Blue Book there was a dark market in used car dealing. With the advent of Kelly's Blue Book, the market is no longer dark since the counterparty can look up the value of a used car and know about what he should pay. Similarly, Wall Street traders racked up huge profits because their counterparties didn't know they were being screwed. That is why they don't want CDSs traded on an exchange or any light cast on their activities. It would cut down on the Wall Street trader's profits.

After Lehman failed, the crisis got even worse. So Geithner and Bernanke got together, much to Paulson's chagrin, and said fuck moral hazard, we have to bail out AIG to save the system, and they did to the tune of $180 billion which came as did the $30 billion for Bear Stearns from the Federal Reserve Bank. Note that this all happened during the Bush administration long before Geithner became Treasury Secretary under Obama. Who engineered the takeover of the banks by the government? Who was the big socialist here? Bush and Paulson, free market guys, not Obama. Obama wasn't even in office yet. The next thing was that Bernanke said he could not keep on doing this. Paulson would have to go to the US Congress and demand money for future bailouts, and the result of this was the TARP, the Troubled Asset Relief Program, to the tune of $700 billion. Paulson, the free market guy who believed in letting the chips fall where they may, stuffed $125 billion down the throats of the big banks whether they liked it or not. Many of them did not want to accept the money.

Later after Geithner became Treasury Secretary under Obama, he argued that investors should not have to take the least bit of a haircut. All their bets should be paid off in full. The casino's integrity would have to be preserved at any and all costs or no one would ever bet there again. Quel horreur! So what that amounted to was that if you placed a bet that Lehman was going down and you bought a naked CDS and then sure enough Lehman went down, Geithner argued that that investor should be paid in full regardless of how little he paid to place his bet in the first place or when he placed the bet! Geithner totally pussyfooted around the big banks, but of course people who were being foreclosed on got absolutely no relief whatsoever. Main Street which suffered the most from the banking crisis was left to go it alone (remember moral hazard?) while the banks were being stuffed with cash. No banker had to take a cut in salary or miss a bonus. Wall Street got bailed out. Main Street got sold out. Bankers weren't forced to write down mortgage principles or lower mortgage interest rates. Any writedowns were strictly voluntary so bankers for the most part ignored them. In the final analysis foreclosures were far more profitable. Investors could buy up foreclosed properties on the cheap paying cash and make a killing when prices went up again.

And with all the fuss over TARP, and unbeknownst to the general public, Bernanke's Federal Reserve was still stuffing the banks with cash. A lawsuit by Bloomberg News forced the Fed to reveal that it had given $7.7 trillion to banks all over the world to prevent the looming crisis. No wonder the banks recovered so quickly! This made TARP trivial by comparison. A lot of these bets that were paid in full were on naked CDSs. Anyone could buy a CDS not just a party or counterparty to the original loan, and since these markets were dark, no one knows how many insiders walked off with billions when they knew which way the wind was blowing or how little they paid to place their bets in the first place. Such a one was John Paulson, no relation to the Treasury Secretary. He made $4 billion on one bet. He had Goldman Sachs design a CDO which both he and Goldman knew would fail. Then Paulson bet against it. Goldman's traders enthusiastically talked it up to their clients, er uh, muppets who bought it. Goldman itself bet against its own product. Long story short Paulson made $4 billion which Geithner, of course, demanded that he be paid in toto - no haircut for this sleazy bastard. Now Paulson is using his billions under the Citizens United Ruling of the Supreme Court to donate millions to defeat President Obama and promote right wing policies and politicians. You can thank Tim Geithner for insisting on no haircut for Paulson. Ironically, it was Obama’s Treasury Secretary’s policies that enabled Paulson to pocket the big bucks which he is using to defeat Geithner’s boss!

So what about Blythe Masters who created the CDS when she was a young and pretty twenty something. Her career has gone onward and upward. She still works for JP Morgan Chase. She's the current head of the Global Commodities Department and resides in New York City. She takes no blame for her creation of the Credit Default Swap. She blames the parties and counterparties who made inappropriate use of it. It's their fault not hers. It's faulty execution not the fault of the product itself. She goes blithely along with her life. Masters is Board Chair of the NY Affiliate of the breast cancer charity, Susan G. Komen for the Cure, and a member of the Board of Directors of the National Dance Institute.

April 21, 2012

The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.

What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.

Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."

Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.

The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.

So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.

In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.

All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.

February 29, 2012

Economic cheerleaders on Wall Street and in the White House are taking heart. The US has had three straight months of faster job growth. The number of Americans each week filing new claims for unemployment benefits is down by more than 50,000 since early January. Corporate profits are healthy. The S&P 500 on Friday closed at a post-financial crisis high.

Has the American recovery finally entered the sweet virtuous cycle in which more spending generates more jobs, more jobs make consumers more confident, and the confidence creates more spending?

On the surface it would appear so.

American consumers in recent months have let loose their pent-up demand for cars and appliances. Businesses have been replacing low inventories and worn equipment. The richest 10 per cent, owners of approximately 90 per cent of the nation’s financial capital, have felt freer to splurge. Consumer confidence is at a one-year high, according to data released on Friday.

The U.S. government has not succumbed entirely to the lunacy of austerity. Republicans in Congress have just agreed to extend both a payroll tax cut and extra unemployment benefits, and the US Federal Reserve is resolutely keeping interest rates near zero.

Yet the US economy has been down so long that it needs substantial growth to get back on track – far faster than the 2.2 - 2.7 per cent projected by the Federal Reserve for this year (a projection which itself is likely to be far too optimistic).

A strong recovery can’t rely on pent-up demand for replacements or on the spending of the richest 10 per cent. Consumer spending is 70 per cent of the US economy, so a buoyant recovery must involve the vast middle class.

But America’s middle class is still hobbled by net job losses and shrinking wages and benefits. Although the US population is much larger than it was 10 years ago, the total number of jobs today is no more than it was then. A significant portion of the working population has been sidelined – many for good. And the median wage continues to drop, adjusted for inflation. On top of all that, rising gas prices are squeezing home budgets even more.

Yet the biggest continuing problem for most Americans is their homes.

Purchases of new homes are down 77 per cent from their 2005 peak. They dropped another 0.9 per cent in January. Home sales overall are still dropping, and prices are still falling – despite already being down by a third from their 2006 peak. January’s average sale price was $154,700, down from $162,210 in December.

Houses are the major assets of the American middle class. Most Americans are therefore far poorer than they were six years ago. Almost one out of three homeowners with a mortgage is now “underwater”, owing more to the banks than their homes are worth on the market.

Optimists point to declining home inventories in relation to sales, but they’re looking at an illusion. Those supposed inventories don’t include about 5 million housing units with delinquent mortgages or those in foreclosure, which will soon be added to the pile. Nor do they include approximately 3 million housing units that stand vacant – foreclosed upon but not yet listed for sale, or vacant homes that owners have pulled off the market because they can’t get a decent price for them. Vacancies are up 1m from 2006.

What we’re witnessing is a fundamental change in the consciousness of Americans about their homes. Starting at the end of the second world war, houses were seen as good and safe investments because home values continuously rose. In the late 1960s and 1970s, early baby boomers got the largest mortgages they could afford, and watched their nest eggs grow into ostrich eggs.

Trading up became the norm. Homes morphed into automatic teller machines, as baby boomers used them as collateral for additional loans. By the rip-roaring 2000s, it was not unusual for the middle class to buy second and third homes on speculation. Most assumed their homes would become their retirement savings. When the time came, they’d trade them in for a smaller unit, and live off the capital gains.

The plunge in home values has changed all this. Young couples are no longer buying homes; they’re renting because they’re not confident they can get or hold jobs that will reliably allow them to pay a mortgage. Middle-aged couples are underwater or unable to sell their homes at prices that allow them to recover their initial investments. They can’t relocate to find employment. They can’t retire.

The negative wealth effect of home values, combined with declining wages, makes it highly unlikely the US will enjoy a robust recovery any time soon.

Under these circumstances it’s not enough to rely on low interest rates and make it easier for homeowners who have kept up with their mortgage payments to refinance their underwater homes. The Administration should also push to alter the federal bankruptcy law, so homeowners can use the protection of bankruptcy to reorganize their mortgage loans. (Few will actually do so, but the change would give homeowners more bargaining power to get lenders to voluntarily alter the terms.) A second possibility if for the Federal Housing Administration to offer to take on a portion of a household’s mortgage debt in exchange for an equitable interest in the home, of the same proportion, when it is sold. Such debt-for-equity swaps could help homeowners now struggling to keep up with their mortgage payments, while not adding to the federal budget in future years when housing prices are expected to rise.

But whatever is done will not affect the fundamental change that’s come over Americans with regard to their homes. It’s not clear what will take the place of houses as the major investments of the American middle class.

February 17, 2012

A $25 billion settlement agreement between the nation's largest banks, states, and millions of homeowners who were victims of bad lending practices and fraudulent foreclosures has yet to be fully realized, but a new study from California indicates that many of the same 'illegal' foreclosure practices are still occurring at alarming rates.

A foreclosed home is shown in Stockton, California May 13, 2008. Home foreclosure filings in the U.S. jumped 23 percent in the first quarter from the prior quarter, and more than doubled from a year earlier. (Credit: Reuters/Robert Galbraith)

A report this week showing rampant foreclosure abuse in San Francisco reflects similar levels of lender fraud and faulty documentation across the United States, say experts and officials who have done studies in other parts of the country.

The audit of almost 400 foreclosures in San Francisco found that 84 percent of them appeared to be illegal, according to the study released by the California city on Wednesday.

"The audit in San Francisco is the most detailed and comprehensive that has been done - but it's likely those numbers are comparable nationally," Diane Thompson, an attorney at the National Consumer Law Center, told Reuters.

Across the country from California, Jeff Thingpen, register of deeds in Guildford County, North Carolina, examined 6,100 mortgage documents last year, from loan notes to foreclosure paperwork.

Of those documents, created between January 2008 and December 2010, 4,500 showed signature irregularities, a telltale sign of the illegal practice of "robosigning" documents.

The report also makes the familar point that one of the major problems throughout the foreclosure crisis has been how murky it has become to know who owns the loans on the home being foreclosed upon:

One of the major problems that has emerged in the foreclosure crisis is that it is far from clear that many lenders foreclosing on properties actually own the loans and have the right to take action against them.

In many cases during the housing bubble that burst in 2008, original mortgages were repackaged and sold to so many investors that it is now unclear who actually holds the loans. [The study] could only find the current owners of the mortgages [...] in 287 out of 473 cases.

In the San Francisco study, which studied properties subject to foreclosure sales between January 2009 to November 2011, 45 per cent were sold to entities improperly claiming to be the owner of the loan.

"It is not impossible that there are homeowners who are alleged to have defaulted on loans to which they never fully agreed to and, further, are being foreclosed upon by lenders that might not even own such loans," the report stated.

All of this might be less shocking if it wasn't right on the heals of the mortgage settlement which, as Yves Smith explains at Naked Capitalism on Thursday, is a canard when it comes to bank accountability. The whole point of the settlement -- even the threat of investigations -- has been to make sure the banks change their practices. She writes:

The whole purpose of a settlement is that a party pays damages to rid themselves of liability, and the amount they pay (and “pay” can include the cost of reforming their conduct) is less than what they expect to suffer if they were sued and lost the case (otherwise, it would make more sense for them to fight).

But in the topsy-turvy world of cream for the banks, crumbs for the rest of us, we have, in the words of Scott Simon, head of the mortgage business at bond fund manager Pimco, in an interview with MoneyNews, lots of victims paying for banks’ misdeeds:

“A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load…

“Think about this, you tell your kid, ‘You did something bad, I’m going to fine you $10, but if you can steal $22 from your mom, you can pay me with that.’”

February 06, 2012

With a deadline looming on Monday for state officials to sign onto a landmark multibillion-dollar settlement to address foreclosure abuses, the Obama administration is close to winning support from a crucial state that would significantly expand the breadth of the deal.

The biggest remaining holdout, California, has returned to the negotiating table after a four-month absence, a change of heart that could increase the pot for mortgage relief nationwide to $25 billion from $19 billion.

Another important potential backer, Attorney General Eric T. Schneiderman of New York, has also signaled that he sees progress on provisions that prevented him from supporting it in the past.

The potential support from California and New York comes in exchange for tightening provisions of the settlement to preserve the right to investigate past misdeeds by banks, and stepping up oversight to ensure that the financial institutions live up to the deal and distribute the money to the hardest-hit homeowners.

The settlement would require banks to provide billions of dollars in aid to homeowners who have lost their homes to foreclosure or who are still at risk, after years of failed attempts by the White House and other government officials to alter the behavior of the biggest banks.

The banks — led by the five biggest mortgage servicers, Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — want to settle an investigation into abuses set off in 2010 by evidence that they foreclosed on borrowers with only a cursory examination of the relevant documents, a practice known as robo-signing. Four million families have lost their homes to foreclosure since the beginning of 2007.

As recently as two weeks ago, with federal officials hoping to complete a deal that President Obama could cite in his State of the Union address, California’s attorney general, Kamala Harris, made it clear she was not on board, terming the plan inadequate. But in the last few days, differences have narrowed in negotiations that one participant described as round the clock, with California officials in direct communication with bank representatives for the first time in months.

“For the past 13 months we have been working for a resolution that brings real relief to the hardest-hit homeowners, is transparent about who benefits, and will ensure accountability,” Ms. Harris said in a statement. “We are closer now than we’ve been before but we’re not there yet.”

The settlement has been hamstrung by one delay after another over the last year. Winning California’s support now would represent a major win for the White House in this election year.

“I am encouraged by the conversations we’ve had with many states in the last few days,” said Shaun Donovan, the secretary of housing and urban development. “This will be one of the most significant steps in the recovery of homeowners, neighborhoods and the broader housing market from the worst collapse since the Depression.”

“My fundamental point is that it’s a first step,” he added, citing measures like Mr. Obama’s proposal last week to lower interest rates for homeowners who are still current on their mortgages.

Officials involved in the negotiations cautioned that broader state support could still be days away. And although the timing of any announcement is subject to last-minute maneuvering, as it stands now the deal would set aside up to $17 billion specifically to pay for principal reductions and other relief for up to one million borrowers who are behind on their payments but owe more than their houses are currently worth. The deal would also provide checks for about $2,000 to roughly 750,000 who lost homes to foreclosure.

Those figures are contingent upon the number who respond to the offer, which is likely to go to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. In addition, said Patrick Madigan, the Iowa assistant attorney general, homeowners who participate in the settlement will still have the right to sue the banks for improper behavior in the foreclosure process.

California has been focused on measures that would benefit individual homeowners, while New York has been most interested in preserving its ability to investigate the root causes of the financial collapse.

Another critical issue for California is narrowing the amnesty given to banks because under the state’s False Claims Act, state officials and huge pension funds like Calpers would be able to collect sizable monetary damages from the banks if they could prove mortgages were improperly packaged into securities that later soured. What is more, California’s participation would result in having more money available for many other states, including an estimated $500 million in additional money for Florida.

But the agreement’s terms do not guarantee minimum allocations of mortgage relief by state.

Mr. Donovan added that there had been numerous discussions with individual states that had specific concerns.

California officials and other veterans of the foreclosure crisis are haunted by the failure of past attempts to alter the behavior of the big banks, including a 2008 deal with Countrywide Financial, the subprime giant now owned by Bank of America, and a more recent agreement last April between federal regulators and the biggest mortgage servicers.

The backers of the latest deal insist their plan has more teeth, with a powerful outside monitor to oversee enforcement and heavy monetary penalties if banks fail to live up to commitments. While the past agreement with Countrywide gave banks credit even if their offers to modify the interest rate of the mortgage or write down principal were not accepted by borrowers, this deal counts only what banks actually do for homeowners.

If banks fall short of the multibillion-dollar benchmarks set out for principal reduction and other benefits for homeowners, they will have to pay the difference plus a penalty of up to 40 percent directly to the federal government, according to Mr. Madigan.

The depressed housing market continues to pose a drag on the halting economic recovery. RealtyTrac, which analyzes housing data, predicts two million more foreclosures over the next two years. Some 11 million families owe more on their houses than they are worth.

The settlement, if all states participate, will also include $3 billion to lower the rates of mortgage holders who are current. Banks will get more credit for reducing principal owed and helping families keep their homes, and less for short sales or taking losses on loans that were likely to go bad, like those that were severely delinquent.

December 28, 2011

In her excellent book, "Web of Debt," Ellen Brown questions the whole notion that governments, whether they be the US or the Eurozone, should have to go into debt to private bankers such as Goldman Sachs and Deutsche Bank to get the money they need to finance their operations. Consider the Federal Reserve which is the primary creator of the money supply in the US. It is neither Federal nor is it a reserve. It is a private bank which creates money as an accounting entry on a computer screen. Recently, it loaned over $7 trillion to private banks at a ridiculously low .01% interest rate. That wasn't money it held in reserve; it was money that was "printed" or rather created out of whole cloth. And who do you think sits on the Board of the privately owned Federal Reserve? Jamie Dimon, CEO of JPMorgan Chase! Do you think that the Federal Reserve acts in the interest of anyone other than the large, too big to fail, banks? The banking system prints or creates money all the time, and not only central banks do it. It has been a longstanding practice of banks everywhere to loan out more money than they hold in deposits. This is called "fractional reserve" banking. For example, when a bank takes in $100 in deposits, it will loan out $1000 figuring that that will be sufficient for depositors who wish to redeem their deposits. Unless there's a run on the bank, that usually is sufficient. So money is created by the private banking system all the time and on a daily basis. Many multiples of the banks' deposits are then loaned out at interest.

Individuals, businesses, corporations and governments then borrow money from private banks to meet their needs for expansion and simply to pay their bills. The US government, for example, borrows the money it needs to function essentially from Goldman Sachs and other large banks and then pays interest to those banks. This happens because the US sells Treasury bonds to those large institutions in return for money to fund its wars and pay social security and medicare recipients among other things. The taxpayers are then on the hook for paying the interest on these bonds. Goldman Sachs got the money in the first place from the Federal Reserve so that by means of a little bit of subterfuge (the Federal Reserve cannot by law loan money directly to the US government), money is transferred from the privately owned Federal Reserve bank, which it created out of thin air, to the US government with interest to be paid by the taxpayers to private banking interests. This begs the question that Ms. Brown makes a central point of her book: if a private central bank can increase the money supply by creating money out of thin air as an accounting entry on a computer screen, why can't the government itself create the money to fund its needs? In particular, if the government created the money instead of the private banking system, taxpayers wouldn't be on the hook for the interest payments which are rapidly eating up an ever increasing share of the Federal budget. Interest on the national debt is projected to be $241.6 billion in FY 2012; it will only increase every year as the national debt goes up. The question is why should US taxpayers pay interest to private bankers on the money loaned to the US government which was created by private bankers when the US government itself could just as well have created the money interest free?

The same line of reasoning holds for the Eurozone which is caught up in a debt crisis in which the private banking system is raising interest rates for countries that it considers weak. The rising interest rates make countries such as Spain and Italy even weaker and all this is being fueled by speculators who are shorting the bonds of these countries. Derivative trading such as shorting drives up interest rates since it makes it seem that investors are selling rather than buying the bonds of those countries.

The process of shorting can be simply explained as follows. Suppose my neighbor buys a lawnmower for $500. I then ask to borrow my neighbor's lawnmower to mow my yard. As I'm mowing, another neighbor drives by and offers to buy the mower for $450. As it happens, I know about a sale at the local Sears where I can buy the same exact lawnmower for $400. So I sell the lawnmower for $450., rush down to Sears and buy another one for $400., return the mower to the neighbor I originally borrowed it from and then pocket the $50. profit. Now in the dark world of derivatives markets it's not even necessary to borrow anything from a preexisting owner in order to short sell. These trades are called "naked shorts." The whole effect will drive up interest rates in Greece and Italy making their borrowing costs to turn over their loans even more expensive and hasten the day when these countries will default. Speculators stand to make big money if and when a Eurozone country does default because they have placed large bets on this outcome. It is to be noted that the European Central Bank (ECB) has the same deal that the US Federal Reserve has in that it can't give money directly to one of its member countries. Monies have to be funneled through banks. This means that they are subject to the machinations of the bond market and speculators. If the ECB created the money directly and then loaned it to member countries, the interest rate could be maintained constant as speculators would be eliminated and it would be lower as the private bankers would not be getting their cut.

If the whole notion of a central government creating the money supply as opposed to a private central bank creating it seems radical to you, please bear in mind that this is exactly what Abraham Lincoln did to fund the Civil War and the economic expansion following it including the transcontinental railroad, the land grant colleges and the Homestead Act which gave away free land to settlers in the west. Greenbacks were government created currency which was spent into the market. Today Federal Reserve notes are created by the privately owned Federal Reserve and are the official US currency. Ellen Brown maintains that any government can create a fiat currency. This simply means that the government created currency is declared to be the legal currency of that government. It doesn't have to be backed by gold or anything else. It is the official currency just because the government says it is. Ellen Brown characterizes the Greenback era as follows:

How was all this accomplished with a Treasury that was completely broke and a Congress that hadn't been paid themselves? ... Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. Officially called United States notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war.

The Greenback system was not actually Lincoln's idea. but when pressure grew in Congress for the plan, he was quick to endorse it. The South had seceded from the Union soon after his election in 1860. To fund the War between the States, these Eastern banks had offered a loan package that was little short of extortion - $150 million advanced at interest rates of 24 to 36 percent. Lincoln knew the loan would be impossible to pay off. He took the revolutionary approach because he had no other real choice. The government could either print its own money or succumb to debt slavery to the bankers.

So the war and the economic development following it were financed with goverment created fiat money, the Greenback. This would be perfect today for funding the $2 trillion in infrastructure repair and rebuilding that the IEEE claims is needed - in other words an infrastructure bank. This would solve a lot of the US' unemployment problems as well as bringing the US infrastructure up to par with China and other countries which are modernizing their infrastructure at rates far exceeding the US. The Eurozone ECB could also print or create euros without borrowing or funneling them through private bankers and subjecting the economies of certain countries to the whims of speculators. For the US it would be simple to move the Federal Reserve into the Treasury Department, transfer ownership to the public sector and keep the fact that the chairman would be appointed by the President. To keep its autonomy, Congress should not have the ability to interfere with the newly created Federal Reserve just as the situation exists now. So what would change? Only that the money created would be the equivlent of Greenbacks which would be non-interest bearing notes. Government created money would not be money that the government would have to pay interest on to private sector banks. These Greenbacks could coexist with Federal Reserve notes so that there would be two forms of currency in circulation both of which would be legal tender. Therefore, Federal Reserve notes would not have to be recalled. The new system could be created overnight with a minimum of disruption to commerce.

The Eurozone probably operates the same way. I'm not an expert but I surmise that the large European banks such as Deutsche bank, Societe Generale and ING loan money to Eurozone countries at interest. Even Goldman Sachs, since it is an international bank, probably has its finger in the pie of Eurozone money creation. Even money created by the ECB needs to be funneled through these banks before it gets into the coffers of the respective Eurozone countries. This means that not only are countries such as Greece and Italy paying interest to the large European and international banks but the interest rates they are paying are subject to market speculation which drives them up even more. If the ECB issued euros directly instead of letting the large banks do it, the interest rate could be carefully controlled, the rates wouldn't be subject to speculation and the interest paid would go into the coffers of the ECB instead of into the coffers of large private banks.

Individuals and families in the US and throughbout the world are increasingly indebted to private banks for mortgage debt, student loan debt and credit card debt. Easy credit and low initial interest rates as well as declining wages have induced much of the population to go into debt in the same way that countries have gone into debt. Ultimately, these levels of debt are unsustainable especially if today's historical low interest rates start to rise. Of course the banks' major goal is to have everyone in debt paying interest money to them as a major part of their expenditures. If everyone is a debt slave, the banks are in the position of owning most of society's assets. Ellen Brown's ideas about taking money creation out of private bankers' hands and putting it into the hands of central governments strikes at the core of capitalist economics which assumes that money creation remains entirely privatized. However, other countries such as China have shown that government owned large banks can be a boon to economic development and growth.

Also in the US state owned banks such as the Bank of North Dakota maintain that state in a healthy economic condition compared to the US as a whole. Interest collected on loans goes back into state coffers defraying taxpayer expenses. So lower taxes are the result of a state owned rather than a privately owned bank. The same could be true for countries as well. Also loans can be more carefully controlled so that they go for socially useful purposes rather than fueling speculative investment. Finally, many countries including China and Norway have sovereign wealth funds which act to make those countries more creditworthy than countries which have no assets and only debts. As any banker knows, an individual's creditworthiness represents the difference between his assets and his debts. The same holds true also for countries. If governments created their own money, it could be loaned directly to families that are being foreclosed on instead of relying on private bankers to work out deals with them which they have been reluctant to do thus exacerbating the foreclosure crisis. Greater leniency could also be granted to student loan debtors than is the case now.

Lincoln saved the US an incredible amount of interest repayments by issuing Greenbacks instead of borrowing the money:

In 1972, the United States Treasury Department was asked to compute the amount of interest that would have been paid if the $400 million in Greenbacks had been borrowed from the banks instead. According to the Treasury Department's calculations, in his short tenure Lincoln saved the government a total of $4 billion in interest, just by avoiding this $400 million loan.

Finally, a quote from Thomas Edison from an interview in the 1921 New York Times:

If the Nation can issue a dollar bond it can issue a dollar bill, The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays noboldy but those who contribute in some useful way. It is absurd to say that our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.

Therefore, the "full faith and credit" of the US government and the ECB could apply to currency as well as bonds, and private bankers and speculators could be eliminated from the loop.

December 18, 2011

Mr. President, we heard what you said last week in Kansas – about the dangers to our economy and democracy of the increasing concentration of income and wealth at the top.

We agree.And many of us are prepared to work our hearts out to get you reelected – as long as you commit to doing what needs to be done in your second term:

—Raise the tax rate on the rich to what it was before 1981.The top 1 percent has an almost unprecedented share of the nation’s wealth and income yet the lowest tax rate in 30 years.Meanwhile, America faces colossal budget deficits that have already meant devastating cuts in education, infrastructure, and the safety nets we depend on.The rich must pay their fair share.Income in excess of $1 million should be taxed at 70 percent – the same rate as before 1981.

—Raise capital gains taxes to the same level.It’s absurd that the 400 richest Americans – whose wealth exceeds the wealth of the bottom 150 million Americans put together – should pay an average 17 percent tax on their incomes, the rate day laborers and child-care workers pay.That’s because so much of the income of the super-rich is considered capital gains, now taxed at only 15 percent.Close this loophole.

—Tax financial transactions.A tiny tax on every financial deal would yield billions of dollars more.It would also slow speculators and reduce the wild gyrations of financial markets.

—Use the bulk of this money to create good schools, give our kids access to a college education, and build a world-class infrastructure, so all our children have a chance to get ahead.

— Resurrect the Glass-Steagall Act, that used to separate commercial from investment banking.It was put in place after the Great Crash of 1929 to prevent financiers from gambling with peoples’ bank deposits.But it was repealed in 1999 – and its repeal contributed to the Crash of 2008.Wall Street lobbyists have made sure the new Dodd-Frank law has enough loopholes to allow financiers to continue to gamble with otherpeoples’ money.The only way to stop this is to bring Glass-Steagall back.

—Cap the size of Wall Street’s biggest banks and break up the biggest.They were too big to fail before the bailout.They’re even bigger now.And because of their huge size they get preferential treatment from the Fed, giving them an even greater competitive advantage over smaller banks.Cap their size and break them up before we have to bail them out again.

— Require the big banks that got bailed out to modify the mortgages of millions of Americans now under water, who owe more than their homes are worth.It’s not theirfault the banks created a housing bubble that burst, causing home values to plummet.

Mr. President, we know nothing good happens in Washington unless good people outside Washington are organized and mobilized to make it happen.

So here’s the deal:We’ll reelect you.We’ll stand behind you.We’ll give you a mandate to do all this – and more – in your second term.

December 07, 2011

And now it is winter. Wall Street rejoices, hoping that the change of seasons will mean a change in our spirit, our commitment to stop them.

They couldn't be more wrong. Have they not heard of Washington and the troops at Valley Forge? The Great Flint Sit-Down Strike in the winter of 1936-37? The Michigan Wolverines crushing Ohio State in the 1950 Blizzard Bowl? When it comes to winter, it is the time historically when the people persevere and the forces of evil make their retreat!

We are not even 12 weeks old, yet Occupy Wall Street has grown so fast, so big, none of us can keep up with the hundreds of towns who have joined the movement, or the thousands of actions -- some of them just simple ones in neighborhoods, schools and organizations -- that have happened. The national conversation has been irreversibly changed. Now everyone is talking about how the 1% are getting away with all the money while the 99% struggle to make ends meet. People are no longer paralyzed by despair or apathy. Most know that now is the time to reclaim our country from the bankers, the lobbyists -- and their gofers: the members of the United States Congress and the 50 state legislatures.

And they're crazy if they think that a little climate chaos (otherwise known as winter in the 21st century) that they've helped to bring about is going to stop us.

I would like to propose to my Occupying sisters and brothers that there are many ways to keep Occupy Wall Street going through the winter months. There is perhaps no better time to move the movement indoors for a few months -- and watch it grow even bigger! (For those who have the stamina to maintain the outdoor occupations, by all means, keep it up -- and the rest of us will do our best to help you and keep you warm!)

The winter gives us an amazing opportunity to expand our actions against the captains of capitalism who have occupied our homes with their fraudulent mortgage system which has tossed millions of families out onto the curb; a cruel health care system that has told 50 million Americans "if you can't afford a doctor, go F yourself"; a student loan system that sends 22-year-olds into an immediate "debtors' prison" of working lousy jobs for which they didn't go to school but now have to take because they're in hock for tens of thousands of dollars for the next two decades; and a jobs market that keeps 25 million Americans un- or under-employed -- and much of the rest of the workers forced to accept wage cuts, health care reductions and zero job security.

But we in the Occupy Movement reject this version of the "American Dream." Instead, I suggest we shift our focus for this winter to the following actions:

OCCUPY THE WINTERA proposal to the General Assembly of Occupy Wall Street from Michael Moore

1. Occupy Our Homes. Sorry, banks, a roof over one's head is a human right, and you will no longer occupy our homes through foreclosure and eviction because well, you see, they are our homes, not yours. You may hold the mortgage; you don't hold the right to throw us or our neighbors out into the cold. With almost one in three home mortgages currently in foreclosure, nearing foreclosure or "underwater," the Occupy Movement must form local "Occupy Strike Forces" to create human shields when the banks come to throw people out of their homes. If the foreclosure has already happened, then we must help families move back into their foreclosed homes -- literally (see this clip from my last film to watch how a home re-occupation is accomplished). Beginning today, Take Back the Land, plus many other citizens' organizations nationwide, are kicking off Occupy Our Homes. Numerous actions throughout the day today have alreadyresulted in many families physically taking back their homes. This will continue every day until the banks are forced to stop their fraudulent practices, until homeowners are allowed to change their mortgage so that it reflects the true value of their homes, and until those who can no longer afford a mortgage are allowed to stay in their homes and pay rent. I beseech the news media to cover these actions -- they are happening everywhere. Evictions, though rarely covered (you need a Kardashian in your home as you're being evicted to qualify for news coverage) are not a new story (see this scene I filmed in 1988). Also, please remember the words of Congresswoman Marcy Kaptur of Toledo (in 'Capitalism: A Love Story'): Do not leave your homes if the bank forecloses on you! Let them take you to court and then YOU ask the judge to make them produce a copy of your mortgage. They can't. It was chopped up a hundred different ways, bundled with a hundred other mortgages, and sold off to the Chinese. If they can't produce the mortgage, they can't evict you.

2. Occupy Your College. In nearly every other democracy on the planet, students go to college for free or almost free. Why do those countries do that? Because they know that for their society to advance, they must have an educated population. Without that, productivity, innovation and an informed electorate is stunted and everyone suffers as a result. Here's how we do it in the U.S.A.: make education one of our lowest priorities, graduate students who know little about the world or their own government or the economy, and then force them into crushing debt before they even have their first job. That way has really worked well for us, hasn't it? It's made us the world leader in … in … well, ok, we're like 27th or 34th in everything now (except war). This has to end. Students should spend this winter doing what they are already doing on dozens of campuses -- holding sit-ins, occupying the student loan office, nonviolently disrupting the university regents meetings, and pitching their tents on the administration's lawn. Young people -- we, the '60s generation, promised to create a better world for you. We got halfway there -- now you have to complete the job. Do not stop until these wars are ended, the Pentagon budget is cut in half, and the rich are forced to pay their taxes. And demand that that money go to your education. We'll be there with you on all of this! And when we get this fixed and you graduate, instead of being $40,000 in debt, go see the friggin' world, or tinker around in your garage a la the two Steves, or start a band. Enjoy life, discover, explore, experiment, find your way. Anything but the assistant manager at Taco Bell.

3. Occupy Your Job. Let's spend the winter organizing workplaces into unions. OR, if you already have a union, demand that your leaders get off their ass and get aggressive like our grandparents did. For chrissakes, surely you know we would not have a middle class if it weren't for the strikes of the 1930s-1950s?! In three weeks we will celebrate the 75th anniversary of the workers in my hometown of Flint, Michigan taking over and occupying the General Motors factories for 44 days in the dead of winter. Their actions ignited a labor movement that lifted tens of millions out of poverty and into the middle class. It's time to do it again. (According to the Census Bureau and the New York Times, 100 million Americans either live in or near poverty. Disgraceful. Greed has destroyed the core fabric of our communities. Enough!) Here are two good unions to get your fellow workers to sign up and join: UE and SEIU. The CWA are also good. Here's how to get a quick primer in organizing your place of employment (don't forget to be careful while you do this!). If your company is threatening to close down and move the jobs elsewhere, then it's time to occupy the workplace (again, you can get a lesson in how to successfully occupy your factory from my movie).

4. Occupy Your Bank. This is an easy one. Just leave them. Move your checking and your credit card to a nonprofit credit union. It's safe and the decisions made there aren't based on greed. And if a bank tries to evict your neighbor, Occupy the local branch with 20 other people and call the press. Post it on the internet.

5. Occupy the Insurance Man. It's time to not only stand up for the 50 million without health insurance but to also issue a single, simple demand: The elimination of for-profit, privately-controlled health insurance companies. It is nothing short of barbaric to allow businesses to make a profit off people when they get sick. We don't allow anyone to make a profit when we need the fire department or the police. Until recently we would never allow a company to make a profit by operating in a public school. The same should be true for when you need to see a doctor or stay in the hospital. So I say it's long overdue for us to go and Occupy Humana, United Health, Cigna and even the supposed "nonprofit" Blue Crosses. An action on their lawns, in their lobbies, or at the for-profit hospitals -- this is what is needed.

So -- there are my ideas for the five places we can Occupy this winter. Help the foreclosed-upon to Occupy their homes. Occupy your college campus, especially the student loan office and the regents meetings. Occupy your job by getting everyone to sign a union card -- or by refusing to let the CEO ship your job overseas. Occupy your Chase or Citi or Bank of America branch by closing your account and moving it to a credit union. And Occupy the insurance company offices, the pharmaceutical companies' headquarters and the for-profit hospitals until the White House and Congress pass the true single-payer universal health care bill they failed to pass in 2010.

My friends, the rich are running scared right now. You need no further proof of this than to read this story from last week. The Republicans' top strategist met privately with them and told them that they had better change their tune or they were going to be crushed by the Occupy Wall Street movement. They didn't have to change their greedy actions, he assured them -- just the way they talk and PR the situation. He told them never to use the word "capitalism" -- it has now been made a dirty word by the Occupy movement, he said. Only say "economic freedom" from now on, he cautioned. And don't criticize the movement -- because the majority of Americans either agree with it or are feeling the same way. Just tell the Occupiers and the distressed Americans: "I get it." Seriously.

Yes, in just 12 short weeks we have killed their most sacred word -- Capitalism -- and we have them on the run, on the defensive. They should be. Millions are coming after them and our only goal is to remove them from power and replace them with a fair system that is controlled by the 99%. The 1% have been able to get both political parties to do their bidding. Why should only 1% of the population get to have two parties -- and the rest of us have none? That, too, is going to change. In my next letter, I will suggest what we can do to Occupy the Electoral Process. But first we must start with those who pull the strings of the puppets in the Congress. That's why it's called Occupy Wall Street. Always better to deal with man in charge, don't you think?

Let's Occupy the Winter! An #OWS Winter will certainly lead to a very hopeful American Spring.

December 01, 2011

NEW YORK – Massachusetts sued five major banks Thursday over deceptive foreclosure practices, such as the "robo-signing" of documents, potentially undermining negotiations over the same issue between lenders and state prosecutors across the nation.

Massachusetts sued five major banks Thursday over deceptive foreclosure practices, such as the "robo-signing" of documents, potentially undermining negotiations over the same issue between lenders and state prosecutors across the nation. (photo: Taber Andrew Bain)

The complaint claims the banks violated Massachusetts law with "unlawful and deceptive" conduct in the foreclosure process, including unlawful foreclosures, false documentation, robo-signing, and deceptive practices related to loan modifications. In the foreclosure industry, robo-signing is the practice of a bank employee electronically signing thousands of documents and affidavits without manually verifying the information contained in the document or affidavit.

The lawsuit comes as talks have been dragging on for more than a year between major banks and the attorneys general from all 50 states over fraudulent foreclosure practices that drove millions of Americans from their homes following the bursting of the housing bubble.

In October 2010, major banks temporarily suspended foreclosures following revelations of widespread fraudulent foreclosure practices by banks. The talks have been designed to institute new guidelines for mortgage lending nationwide. It was anticipated to be the biggest overhaul of a single industry since the 1998 multistate tobacco settlement.

However, over the past year, several obstacles have arisen. Attorneys general of different states have disagreed over what terms to offer the banks. In September, California announced it would not agree to a settlement over foreclosure abuses that state and federal officials have been working on for more than a year.

Coakley, along with New York Attorney General Eric Schneiderman and Delaware's Beau Biden, have argued that banks should not be protected from future civil liability. Other states, including Kentucky, Minnesota and Nevada, have raised concerns about the extent of legal civil immunity the banks could receive as part of a settlement.

Both sides have also argued over the amount of money that should be placed in a reserve account for improperly foreclosed upon property owners. Many of the larger points of the deal, including a $25 billion cost for the banks, have been worked out, according to people briefed on the internal discussions but who are not authorized to speak publicly about them.

Details of a settlement had been expected to be announced sometime this month.

The lead negotiator on behalf of state prosecutors, Iowa Attorney General Tom Miller, said in a statement that he hopes Massachusetts would join that broader settlement as the final details are worked out.

"We're optimistic that we'll settle on terms that will be in the interests of Massachusetts," Miller said.

November 07, 2011

Much has been said about Occupy Wall Street's lack of particular demands. However, their inchoate demands are numerous and plentiful, and what they amount to when totaled up is a complete repudiation of the organization of business and government and the way they are now constituted which isn't the way the Founding Fathers envisioned them at all. The way business is being conducted in the US amounts to a transmogrification of American values under the guise of an evolution of those values. America has morphed into a pseudo republic based on lies and hypocrisy, on militarism in the name of rationality, on the worship of money and the legitmation of any means to obtain it. Without getting specific the Occupy movement represents a repudiation of these abhorrent values which represent the corruption of everything Americans used to hold dear in the service of unmitigated greed and a glorification of unlimited wealth regardless of the plight of the vast majority of the people.

What the Occupy movement really wants in a vague indefinite way among other things is

(1) Getting money out of politics. That encompasses two ideas: that political campaigns should be publicly funded instead of funded by Wall Street and other wealthy interests and that lobbyists should be gotten out of Washington. Right now 40,000 lobbyists swarm Capitol Hill writing legislation in favor of the corporations that pay them an average of $300,000. starting salary to obtain legislation that stacks the cards in the corporations' favor. Is it any wonder tax policy favors the rich and exploits the poor? Does anyone truly think that getting money out of politics can be accomplished without a revolution? No way. The wealthy and the powerful will never back off. They have morphed American democracy into a plutocracy, and Democrats, who by and large have been bought off by the same wealthy interests, are not a true opposition party. They talk out of one side of their mouth while fund raising out of the other. True democracy cannot exist again until politics becomes something other than the tool of monied interests.

(2) The rich must pay their fair share of taxes. Tax policy as a result of frenetic lobbying has favored the rich while exploiting the poor. That's the whole purpose of lobbying: to seek tax advantages for the rich at the expense of the poor. That's the whole raison d'etre for lobbyists getting paid their obscene salaries. Reagan and Greenspan were experts at raising taxes on the poor while lowering them on the rich and at the same time obfuscating what they were doing and convincing the middle class that taxes were being fairly raised or lowered on everyone. Not true. Implicit in the tax code is favorable treatment for the upper 1% and an albatross around the neck of the poor and middle class - the 99%. Wealthy Wall Streeters pay only a 15% capital gains tax and benefit from "carried interest" which gives them the same tax rate no matter how many billions they make. And Republicans fight like hell to preserve these tax advantages for the rich, every last penny of them. They will never agree to tax capital gains as ordinary income, a millionaires's tax or a financial transactions tax. Does anyone think that any of these things can be accomplished without a revolution?

(3) The filibuster rule. The most antidemocratic tool of the Republican dominated Senate. A return to democracy would require the abolition of the filibuster rule. Does anyone think this can be accomplished without a revolution? The filibuster rule means that the majority does not rule and never will again as long as the present regime holds sway.

(4) Health care as a right. Medicare for all. Medicare's overhead is 3%. Private health insurance's overhead is 30%. Health insurance corporation CEOs made an average of $11 million last year while the highest salary paid to anyone in Medicare administration was less than $200,000. That's the reason why health care is becoming so expensive with paltry outcomes. Private health insurance corporations are under Wall Street's thumb. Wall Street demands higher and higher profits and increasing returns for investors. The result comes about from reducing the Medical Loss Ratio (MLR) which is the percentage paid out for actual medical care compared to the percentage paid out to investors and CEOs. I'ts a classic case of profit over people and again Wall Street is the culprit. Is there a theme developing here? Wall Street has its finger in every pie of the economy demanding that profits be placed over people. The Occupy Wall Street movement has pointed its finger at the exact culprit in every facet of American life that needs changing and Wall Street is at the heart of it. Does anyone think the US will join the rest of the world in providing a universal, cost contained health care system without a revolution? There is no way that "reform" will accomplish this. Obamacare was a valiant effort, but, ultimately, it is no complete solution, and its provisions are subject to being rolled back at the first opportunity by Republicans who want to eliminate not only Obamacare but also social security, Medicare, Medicaid and any other social program benefitting the poor and middle class.

(5) The student loan crisis. The heart of the student loan crisis is the privatization of the student loan industry. Instead of assisting or subsidizing students to get a college education, privatization has led to the exploiting of students in order to maximize profits. Again Wall Street is at the heart of the problem demanding higher and higher returns for investors. Instead of assisting students, the private student loan industry exploits them burdening them for life with debt which cannot be discharged in bankruptcy. Republicans and Wall Street worked together to change the law in 2006 which now requires students to pay for life to discharge their debt even going so far as to allow garnishing of their social security benefits. Democratic legislation under Obama has rolled back some of these draconian measures but has done nothing to reverse the bankruptcy law of 2006. Again Wall Street has been catered to and profits have been placed above people. Does anyone think students will ever be able to dischartge student loan debt in bankruptcy without a revolution?

(6) The foreclosure crisis. Wall Street was allowed to get completely off the hook with regard to mortgage loan modification. The performance of Obama's Home Affordable Modification Program (HAMP) has been underwhelming at best. Housing experts say the $1,000 payments mortgage servicers get for successful modifications, and the lack of consequences for disobeying program guidelines, don't provide enough incentive to modify many mortgages. The well intentioned Obama administration made mortgage modification voluntary on the part of the banks. Guess what? Wall Street has decided it would not "volunteer" to reduce its profits by giving underwater home owners a break. Again the middle class gets screwed in order to maximize Wall Street profits. What was Obama thinking? Does anyone think Wall Street will write down mortgages giving themselves a voluntary haircut without a revolution? Does anyone think Republicans will have a change of heart and suddenly decide to do the right thing with respect to the middle class against the wishes of Wall Street as long as they control at least one branch of Congress or even if Democrats control both branches of Congress and the Presidency as long as the filibuster rule is in effect? Does anyone think mortgages will ever be modified favoring the middle class without a revolution?

(7) Jobs. Does anyone think the government will ever create jobs directly by reinstating an FDR style Works Progress Administration (WPA) or Civilian Conservation Corps (CCC) or even an infrastructure bill without a revolution? Will it ever be the policy of the US to be the employer of last resort without a revolution? It'll never happen. Instead, homelessness on an ever increasing scale will become a "normal" part of American life because this is perfectly consistent with capitalism. The impoverishment of millions will become normalized. As Herman Cain says, "If you don't have a job, blame yourself." THe US will join the rest of the underdeveloped world in a world class regression to a society composed of the very rich and an extremely impoverished class of everyone else.

(8) Corporations are people; money is speech. The Citizens United Supreme Court decision verified that corporations are people and money is speech. In particular corporations can spend as much money as they want on political advertising. They have an unlimited right to spend as much as they want to get the candidates elected who will do their bidding. They can propagandize to their heart's content, and the easily led lemmings will buy it and follow them off a cliff. There is no other consideration in electoral politics than money. Democracy is irrelevant; plutocracy shall rule the day. Does anyone think that anything short of a revolution will change this state of affairs?

(9) The war in Afghanistan should be ended, and the $2 billion per week that the US is spending there should be spent on improving the lives of American citizens. The military-industrial complex budget should be cut in half. The US spends more on its military than all the rest of the world combined. It has over 1000 military bases located in just about every country in the world. This money is being wasted because defense contractors have some of the strongest and most prolific lobbyists on Capitol Hill. According to Prophets of War, Lockheed Martin and the Making of the Military-Industrial Complex by William D Hartung: Lockheed Martin "spent $15 million on lobbying and campaign contributions in 2009 alone. Add to that its 140,000 employees and its claim to have a prescence in forty-six states, and the scale of its potential influence starts to become clear. And while its current political activities are perfectly legal, the company has also been known to break the rules: It ranks number one on the database on contractor misconduct maintained by the Washington-based watchdog group Project on Government Oversight (POGO); according to POGO, Lockheed Martin has '50 instances of criminal, civil or administrative misconduct since 1995.'" So the military-industrial complex of which Lockheed Martin is the leading exponent uses its poltical influence in Washington to make sure it keeps its profits high as Wall Street demands. Again Wall Street is implicated as it demands the highest possible profits for its investors in the military-industrial complex.

Instead of overspending on the military-industrial complex, the US should adopt the model that was successfully used recently in Libya. Military goals were accomplished by joining with NATO partners to spread the cost, and not one American life was lost. Does anyone think the powerful defense contractor lobby will back down, and American taxpayer money will be spent primarily on benefitting the American people instead of trying to control and dominate the world without a revolution?

The social contract which implied that, if you studied hard, obtained a college degree and tended to your knitting, you would be rewarded with a good job has completely broken down. Corporations have no responsibility to provide anyone with a job. Instead their only allegiance at the behest of Wall Street is to their bottom line. Wall Street demands that they increase profits. They do so not by providing American jobs but by outsourcing jobs to wherever in the world labor is cheapest. Then they turn around and demand that their taxes be lowered and regulations be gutted, and say disingenuously that that is the only way they will hire more people. But they continue to outsource jobs even though their taxes are the lowest of any historical period since the Great Depression and they are sitting on $2 trillion in cash that they prefer not to use employing people. Instead they buy back their own stock and gamble on Wall Street.

So what is a college education worth these days? Not much. It does not represent the promise of a happy future but instead a burden of debt which may last a life time. The education industry goes on an advertising binge to convince potential students that the only way they will have a promising future is to matriculate and borrow money. Hopefully, students are waking up to this sham. A college diploma used to be a ticket of admission to employment with a corporation. Certainly most college diplomas do not prepare one to become self-employed, only employed by others. If a person seeks to be self-employed, they do not need a college diploma in most cases. They don't need a ticket of admission to the corporate world in order to start their own business. Steve Jobs had no college diploma. Bill Gates has no college diploma. Larry Ellison has no college diploma. These are billionaires in the world of high tech. They do, however, want their employees to have college diplomas, and it matters little to them whether these employees come from the US, India, China, Korea or someplace else. In fact they prefer overseas college graduates because they will work cheaper. Most contractors and tradesmen do not need college diplomas, and the work they do for the most part is localized and can't be exported. A word to the wise ...

Each and every public space and institution is under attack by Republicans. Public schools, public parks, public libraries are being defunded as are public teachers, park rangers, librarians, police and firemen. Republican goals are to diminish public spaces and the jobs supporting them so that they can "drown them all in the bathtub" as Grover Norquist wants. Public spaces are being impoverished at the same time private wealth is being enhanced by every means available. Public America is being turned into poverty while private America gains. And when public spaces and public jobs are diminished, the poor and middle class suffer because the rich only use private spaces - private resorts, private universities, private security companies, private libraries, private schools. A country can be rich in private wealth but poor and in debt with respect to public wealth. Such is the fate of the US under Republican rule.

The Occupy Wall Street movement is joining with movements all over the world in waking up to the fact that Wall Street is at the heart of the world's problems. They are wise not to particularize their demands because then they would be offered some sham, watered down solution which would do nothing to curtail Wall Street's power and its dominance over not only America's but Europe's political systems. Neither the US nor the euro zone has the guts to stand up to Wall Street and its extensions in Europe because this might lead to another recession. Instead, they put bandaids on the present system in the hopes that they will be able to normalize things even though "normal" means the impoverishment and the indenturization of the majority of the people.

May 16, 2011

WASHINGTON -- A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.

The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.

The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges.

The federal audits mark the latest fallout from the national foreclosure crisis that followed the end of a long-running housing bubble. Amid reports last year that many large lenders improperly accelerated foreclosure proceedings by failing to amass required paperwork, the federal agencies launched their own probes.

The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

Two of the firms, including Bank of America, refused to cooperate with the investigations, according to the sources. The audit on Bank of America finds that the company -- the nation’s largest handler of home loans -- failed to correct faulty foreclosure practices even after imposing a moratorium that lifted last October. Back then, the bank said it was resuming foreclosures, having satisfied itself that prior problems had been solved.

According to the sources, the Wells Fargo investigation concludes that senior managers at the firm, the fourth-largest American bank by assets, broke civil laws. HUD’s inspector general interviewed a pair of South Carolina public notaries who improperly signed off on foreclosure filings for Wells, the sources said.

The investigations dovetail with separate probes by state and federal agencies, who also have examined foreclosure filings and flawed mortgage practices amid widespread reports that major mortgage firms improperly initiated foreclosure proceedings on an unknown number of American homeowners.

The FHA, whose defaulted loans the inspector general probed, last May began scrutinizing whether mortgage firms properly treated troubled borrowers who fell behind on payments or whose homes were seized on loans insured by the agency.

A unit of the Justice Department is examining faulty court filings in bankruptcy proceedings. Several states, including Illinois, are combing through foreclosure filings to gauge the extent of so-called “robo-signing” and other defective practices, including illegal home repossessions.

Representatives of HUD and its inspector general declined to comment.

The internal audits have armed state officials with a powerful new weapon as they seek to extract what they describe as punitive fines from lawbreaking mortgage companies.

A coalition of attorneys general from all 50 states and state bank supervisors have joined HUD, the Treasury Department, the Justice Department and the Federal Trade Commission in talks with the five largest mortgage servicers to settle allegations of illegal foreclosures and other shoddy practices.

The five giant mortgage servicers, which collectively handle about three of every five home loans, offered during a contentious round of negotiations last Tuesday to pay $5 billion to set up a fund to help distressed borrowers and settle the allegations.

That offer -- also floated by the Office of the Comptroller of the Currency in February -- was deemed much too low by state and federal officials. Associate U.S. Attorney General Tom Perrelli, who has been leading the talks, last week threatened to show the banks the confidential audits so the firms knew the government side was not “playing around,” one official involved in the negotiations said. He ultimately did not follow through, persuaded that the reports ought to remain confidential, sources said. Through a spokeswoman, Perrelli declined to comment.

Most of the targeted banks have not seen the audits, a federal official said, though they are generally aware of the findings.

Some agencies involved in the talks are calling for the five banks to shell out as much as $30 billion, with even more costs to be incurred for improving their internal operations and modifying troubled borrowers’ home loans.

But even that number would fall short of legitimate compensation for the bank's harmful practices, reckons the nascent federal Bureau of Consumer Financial Protection. By taking shortcuts in processing troubled borrowers' home loans, the nation's five largest mortgage firms have directly saved themselves more than $20 billion since the housing crisis began in 2007, according to a confidential presentation prepared for state attorneys general by the agency and obtained by The Huffington Post in March. Those pushing for a larger package of fines argue that the foreclosure crisis has spawned broader -- and more costly -- social ills, from the dislocation of American families to the continued plunge in home prices, effectively wiping out household savings.

The Justice Department is now contemplating whether to use the HUD audits as a basis for civil and criminal enforcement actions, the sources said. The False Claims Act allows the government to recover damages worth three times the actual harm plus additional penalties.

Justice officials will soon meet with the largest servicers and walk them through the allegations and potential liability each of them face, the sources said.

Earlier this month, Justice cited findings from HUD investigations in a lawsuit it filed against Deutsche Bank AG, one of the world's 10 biggest banks by assets, for at least $1 billion for defrauding taxpayers by "repeatedly" lying to FHA in securing taxpayer-backed insurance for thousands of shoddy mortgages.

In March, HUD's inspector general found that more than 49 percent of loans underwritten by FHA-approved lenders in a sample did not conform to the agency's requirements.

Last October, HUD Secretary Shaun Donovan said his investigators found that numerous mortgage firms broke the agency’s rules when dealing with delinquent borrowers. He declined to be specific.

The agency’s review later expanded to flawed foreclosure practices. FHA, a unit of HUD, could still take administrative action against those firms for breaking FHA rules based on its own probe.

The confidential findings appear to bolster state and federal officials in their talks with the targeted banks. The knowledge that they may face False Claims Act suits, in addition to state actions based on a multitude of claims like fraud on local courts and consumer violations, will likely compel the banks to offer the government more money to resolve everything.

But even that may not be enough.

Attorneys general in numerous states, armed with what they portray as incontrovertible evidence of mass robo-signings from preliminary investigations, are probing mortgage practices more closely.

The state of Illinois has begun examining potentially-fraudulent court filings, looking at the role played by a unit of Lender Processing Services. Nevada and Arizona already launched lawsuits against Bank of America. California is keen on launching its own suits, people familiar with the matter say. Delaware sent Mortgage Electronic Registration Systems Inc., which runs an electronic registry of mortgages, a subpoena demanding answers to 75 questions. And New York’s top law enforcer, Eric Schneiderman, wants to conduct a complete investigation into all facets of mortgage banking, from fraudulent lending to defective securitization practices to faulty foreclosure documents and illegal home seizures.

A review of about 2,800 loans that experienced foreclosure last year serviced by the nation's 14 largest mortgage firms found that at least two of them illegally foreclosed on the homes of "almost 50" active-duty military service members, a violation of federal law, according to a report this month from the Government Accountability Office.

Those violations are likely only a small fraction of the number committed by home loan companies, experts say, citing the small sample examined by regulators.

In an April report on flawed mortgage servicing practices, federal bank supervisors said they “could not provide a reliable estimate of the number of foreclosures that should not have proceeded."

The review of just 2,800 home loans in foreclosure compares with nearly 2.9 million homes that received a foreclosure filing last year, according to RealtyTrac, a California-based data provider.

“The extent of the loss cannot be determined until there is a comprehensive review of the loan files and documentation of the process dealing with problem loans,” Bair said last week, warning of damages that could take “years to materialize.”

Home prices have fallen over the past year, reversing gains made early in the economic recovery, according to data providers Zillow.com and CoreLogic. Sales of new homes remain depressed, according to the Commerce Department. More than a quarter of homeowners with a mortgage owe more on that debt than their home is worth, according to Zillow.com. And more than 2 million homes are in foreclosure, according to Lender Processing Services.

Rather than punishing banks for misdeeds, the administration is now focused on helping troubled borrowers in the hope that it will stanch the flood of foreclosures and increase consumer confidence, officials involved in the negotiations said.

Levying penalties can't accomplish that goal, an official involved in the foreclosure probe talks argued last week.

For their part, however, state officials want to levy fines, according to a confidential term sheet reviewed last week by HuffPost. Each state would then use the money as it desires, be it for facilitating short sales, reducing mortgage principal, or using the funds to help defaulted borrowers move from their homes into rentals.

In a report last week, analysts at Moody’s Investors Service predicted that while the losses incurred by the banks will be “sizable,” the credit rating agency does “not expect them to meaningfully impact capital.”

May 02, 2011

The epidemic of foreclosures that began in 2008 has been devastating America’s families, communities and the state economy.

Nowhere is this more true than in California, where one in five U.S. foreclosures has taken place. Since 2008, more than 1.2 million Californians have lost their homes, and the number is expected to exceed 2 million by the end of next year. More than a third of California homeowners with a mortgage already owe more on their mortgages than their homes are worth.

As a result, home values in the state are estimated to plummet by $632 billion. That translates into a loss of more than $3.8 billion in property taxes. One foreclosed home in a neighborhood can reduce property values for the rest of the houses in the neighborhood, and a cluster of foreclosed houses compounds the physical, economic, and social devastation.

And just as local governments are starving for revenues, they are asked to deal with the increased costs - estimated at $17.4 billion over four years - caused by the foreclosure mess. These include public safety, maintenance of abandoned and blighted properties, inspections, trash removal, sheriff evictions, unpaid water and sewer charges, and the provision of emergency shelter.

We can't solve California's fiscal disaster without addressing the foreclosure crisis. It doesn't make sense to make severe cuts to state and local budgets only to allow Wall Street banks and their overpaid CEOs to drain billions more from our state. The banks created the housing crisis with toxic lending practices and they need to be part of this solution.

A bill sponsored by Assemblyman Bob Blumenfield (Democrat, Los Angeles) -- the Foreclosure Mitigation Fee (AB 935), which is currently going through legislative hearings - would require banks to pay their share of foreclosure costs. Backed by a broad coalition of consumer, community and labor groups, the bill would impose a $20,000 fine on banks for each foreclosure.

The $12 billion revenue over next two years would go entirely to local communities in order offset the multiple costs borne by our neighborhoods because of foreclosures and shared between public safety, public education, local governments, redevelopment activities and small businesses.

Los Angeles County alone will face an estimated 381,461 foreclosures through 2012, costing local governments $918 million in lost property taxes and $2.8 billion to pay for the problems. Riverside and San Bernardino counties have been particularly hard hit by the foreclosure earthquake. But no county, city, or small town in California has been spared the devastation.

Indeed, the foreclosure tsunami and the housing market crash are the primary causes of the severe budget crisis facing California's municipalities and counties, forcing local officials to slash services and lay off tens of thousands of employees.

But many Californians are asking, why should taxpayers and communities have to pick up the tab, and face such hard times, for a crisis they didn't cause? They - and the families caught in the maelstrom - are the victims of this human-made disaster.

And let's be frank. Wall Street's reckless and predatory lending practices were responsible for the mess we're now in. Bankers pushed homeowners into high-cost loans they couldn't afford. They engaged in deceptive and often illegal activities, like not informing consumers that they qualified for conventional loans, tricking them into more costly and risky subprime mortgages.

Wall Street banks bundled these risky loans into "mortgage backed securities" that were given the seal-of-approval of ratings agencies (Moody's and Standard & Poor), and then sold them to foreign governments, pension funds and other unwitting investors.

When the scam imploded and Wall Street's bets went sour, the bankers were bailed out by the taxpayers. Goldman Sachs got $53 billion in bailout funds; Bank of America received $230 billion; Wells Fargo pocketed $43 billion. Meanwhile, the top executives got outrageous compensation packages. Last year, for example, Wells Fargo CEO John Stumpf received $17.1 million in salary and bonuses.

But California residents lost billions in savings in their homes, neighborhoods were devastated, businesses crashed and laid off employees, and local governments spiraled downward into fiscal hell.

The largest banks - the Bank of America, JP Morgan Chase, Wells Fargo, and Citigroup - are among the top lenders foreclosing on California families. Not surprisingly, these are among the banks that have been flooding Sacramento with political cash in order to thwart legislation designed to make them - the real culprits of the foreclosure massacre - pay for the suffering they've caused.

Since 2007, the financial industry has spent $70 million to buy political influence in the state Capitol - that's nearly $50,000 per day. Almost $46 million went for campaign contributions to candidates and elected officials, while more than $23 million went for lobbying expenses.

Six banks alone – B of A, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- have invested more than $9 million in political cash. Lobbyists and industry associations, like the California Bankers Association, the California Independent Bankers Association, and the California Mortgage Bankers Association, have doled out $4.5 million in what some call our system of legalized bribery.

The key organizations behind this pro-consumer bill include the Alliance of Californians for Community Empowerment, the Service Employees International Union, the California Reinvestment Coalition, the community organizing group PICO California as well as the California Council of Churches, California Association of Retired Americans, California Labor Federation, California Nurses Association, the Center for Responsible Lending, and the State Building and Construction Trades Council. They correctly believe that California's economy can't recover without addressing the cost of the foreclosure crisis.

AB 935 doesn't solve the entire foreclosure calamity. But it does have several very positive aspects. First, it may create an added incentive for banks to modify more loans so that families can remain in their houses. So far, most banks have pushed the pause button when it comes to renegotiating troubled mortgages with owners who could lose their homes through no fault of their own. Second, the revenues collected from the foreclosure fee will reimburse local governments for some (though certainly not all) of the costs our communities are now facing from foreclosures.

Until we make the banks pony up for the devastation they've caused, the taxpayers are left holding the bag, subsidizing the reckless behavior of excessively paid top bank officers, who threw a huge party for themselves and are making the rest of us clean up their mess. That’s not shared sacrifice.

Right now, Californians are bearing the full expense of the foreclosure mess. Shouldn’t the big banks be part of solution to the problem they helped create?

After a news report showed banks were improperly foreclosing on members of the military, the companies are scrambling to fix the problems and camo-wash their images.

Iraq veteran and U.S. Paralympic alpine skier Heath Calhoun, 30, walks past the new home that is being built for his family by the veterans group, Homes For Our Troops, and members of his community. (AP Photo/Kristin M. Hall)

Last week, the mortgage servicing arm of JPMorgan Chase reached an unusual settlement in a class action lawsuit, acknowledging it had charged illegally high interest rates and wrongfully foreclosed on 6,000 homeowners across the country. JPMorgan agreed to give $12 million to the individuals and $15 million to a fund for additional damages, on top of $6 million already promised for these particular violations.

So had one of the major corporate forces behind the foreclosure crisis finally come to terms with its criminal activities and done right by the customers it defrauded? Hardly. Last week's settlement, and similar ones by other banks, relate only to a very specific type of foreclosure fraud: violations of the Servicemembers Civil Relief Act. Banks are hoping that by compensating members of the military for improper foreclosures, they can boost their public image and avoid responsibility for the broader foreclosure crisis and the truckload of violations committed against civilian borrowers.

NBC News first reported back in January that the nation's leading mortgage companies had illegally charged service members higher interest rates than allowed under the SCRA, and even foreclosed on active duty soldiers while they served in Iraq, Afghanistan and other venues. The SCRA, which has been in place since World War I, stipulates that legal proceedings against service members must be stayed until they return from active duty. A more recent amendment to the law limits interest rates for active duty personnel to 6 percent.

Even the Republican House of Representatives -- generally more reluctant to address foreclosure concerns than its Democratic predecessor -- could not ignore these violations. The Veterans Affairs Committee held a hearing in February on the issue in which passions ran high and one congressman essentially accused the banks of homicide. "Service members hold a favored position among Democrats and Republicans," said Rep. Brad Miller (D-N.C.) at the hearing. "Republicans are more willing to hold a hearing on abuse of service members than the abuse of other homeowners."

Within weeks, JPMorgan and other top banks not only admitted fault, but made restitution. To people who had followed the foreclosure fraud issue closely, this was astounding. For years, banks have denied any wrongful foreclosures or errors in their foreclosure processes, despite clear evidence of persistent abuse.

But with the military foreclosures, it only took one report on NBC and one congressional hearing to open the floodgates. JPMorgan, in addition to the class action settlement described above, reduced all interest rates for active duty military to 4 percent, lower than required by the SCRA. It inaugurated a special loan modification program for all military personnel who have served since September 11, 2001. It donated 1,000 homes to veterans, and committed to hiring 100,000 veterans over the next five years. And for service members who experienced a wrongful foreclosure while serving overseas, it gave them back their homes for free, forgiving all remaining mortgage debt.

Wells Fargo settled a similar class action lawsuit on military foreclosures for $10 million and instituted a modification program. So did Saxon Mortgage, a division of Morgan Stanley. And Bank of America's program for military personnel reduces principal to 100% of the current market rate. This is particularly notable, since just a day before instituting the program, Bank of America CEO Brian Moynihan rejected principal reductions for the bank's underwater borrowers, calling them "unworkable" and unfair. Moynihan stated, "There's a core problem that if you start to help certain people and don't help other people, it's going to be very hard to explain the difference."

Yet that's what the entire mortgage industry is doing. And the reason for it is simple. The banks know that the military is one of the only widely respected institutions left in the country, and well-publicized instances of abuse of service members will cause a far bigger backlash than they have experienced to this point. What's more, evidence of wrongful foreclosures on the military will lead to further scrutiny of their actions with other borrowers.

This is what you could call "camo-washing," similar to the greenwashing that corporations employ to create an appearance of attentiveness to environmental issues. The banks bend over backwards for the benefit of members of the military they have wronged, to distract from the fact that they're not doing the same for millions of others. It also works to enhance their public image, positioning them as sympathetic and responsible, willing to make good when they screw up.

But the logic is lacking. Banks are fighting any settlement to the foreclosure fraud scandal that forces them to pay penalties to their borrowers. But they're showering service members with money and free homes. All the attention and care paid to military foreclosures simply underscores the fact that next to nothing is being done with all the wrongful foreclosures on everyone else. Almost three million families will get a foreclosure notice this year, just about the same number as last year and in 2009. But the banks are focusing on a small handful of military foreclosures.

Nobody denies that foreclosing on members of the military while they serve overseas is particularly egregious. But hardworking civilians duped into loans, ravaged by an economic meltdown and stonewalled in their effort to save their homes are not somehow less deserving than the men and women on the front lines.

Take the case of a Milwaukee man, ironically an ex-Marine, about to be evicted from his home despite making every single mortgage payment on time, because the company he refinanced with never paid off his original loan, saddling him with a mortgage he never discovered until it was already sold at auction. Does that negligence somehow exist on a different plane than SCRA violations?

Mortgage servicers illegally foreclosed on active duty military for the same reason they violated other laws with respect to foreclosures: They chose to ignore these laws, preferring to maximize profits, cut corners and act with blatant disregard for their customers. To distract from the bigger picture of foreclosure fraud, banks are peddling this modification program to a small sliver of their customer base, while at the same time telling everyone else in the same mess that they're on their own.

February 02, 2011

Put your ear to the ground and you can almost hear the bulls stampeding. The Dow closed above 12,000 Tuesday for the first time since June 2008. The Dow is up 4 percent this year after increasing 11 percent in 2010. The Standard & Poor 500 is also up 4 percent this year, and the Nasdaq index, up 3.7 percent.

“The U.S. economy is back!” says a prominent Wall Streeter.

Ummm. Not quite.

Corporate earnings remain strong (better-than-expected reports from UPS and Pfizer fueled Tuesday’s rally). The Fed’s continuing slush pump of money into the financial system is also lifting the animal spirits of Wall Street. Traders like nothing more than speculating with almost-free money. And tumult in the Middle East is pushing more foreign money into the relatively safe and reliable American equities market.

It’s simply wonderful, especially if you’re among the richest 1 percent of Americans who own more than half of all the shares of stock traded on Wall Street. Hey, you might feel chipper even if you’re among the next richest 9 percent, who own 40 percent.

But most Americans own a tiny sliver of the stock market, even including stocks in their 401(k) plans.

What do most Americans own? To the extent they have any significant assets at all, it’s their homes.

And the really big story right now – in terms of the lives of most Americans, and the effects on the US economy — isn’t Wall Street’s bull market. It’s Main Street’s bear housing market.

According to the Wall Street Journal’s latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas, compared to a year earlier. And remember how awful things were in the housing market a year ago! In fact, the size of the year-to-year price declines is larger than the previous quarter’s in all but three of the markets surveyed.

Home prices have dropped most in cities already hard hit by the housing bust – Miami, Orlando, Atlanta, Chicago. But declines increased in other markets that had before escaped most of the downdraft, such as Seattle and Portland.

Things could easily get worse on the housing front because millions of owners are in various stages of foreclosure or seriously delinquent on their mortgages. Millions more owe more than their homes are worth, and, given the downward direction of the housing market, are going to be sorely tempted to just walk away. This means even more foreclosure sales, pushing housing prices down even further.

So don’t be fooled. The American economy isn’t back. While Wall Street’s bull market is making America’s rich even richer, most Americans continue to be mired in a worsening housing crisis that the Administration is incapable of stemming, and of which Wall Street has now seemingly washed its hands.

And they shredded a bedrock principle of capitalism, throwing hundreds of years of settled property law into doubt and in turn creating a massive drag on Main Street's economic “recovery.”

They got rich in the process. The mortgage industry did all of that for a fat stream of profits while the going was good, but now that they face the prospect of being held accountable by the justice system -- as would you or I had we routinely broken the laws -- analysts expect the “banksters” to lobby hard for another bailout.

They won't be looking for the Fed to shower them with free money or buy up trillions worth of “toxic assets” weighing down their books – they already got that sort of bailout once, the voters detested it and with the Tea Party ascendant in the GOP, the political atmosphere precludes a repeat performance.

No, the mortgage industry – with the help of its political lackeys in Washington-- is reportedly looking for a judicial bailout that would retroactively allow loan servicers to foreclose on properties without running up the costs of getting their paperwork in order, and limit investors' – and possibly the states' – ability to sue them for the mess they created in the housing market.

Third Way, the financial industry's Trojan Horse in Democratic policy circles (which is very well represented in the White House), released a policy memo last week urging Congress to step into the chaos caused by the banks' “robo-signing” scandal and immunize the banks from liability from the robo-signing mess (PDF).

As economics writer Yves Smith noted, the proposal “advocates Congressional intervention into well established, well functioning state law.”

This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that "dirt law" is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.

This sort of protection is fundamental to the operation of capitalism, so it's astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm.

Lenders are playing down the mess they created, suggesting they're simply dealing with some isolated “paperwork” issues. But the Third Way memo comes in the wake of a series of judicial setbacks for the banks that indicate their legal problems are likely to be anything but “minor.”

Last year, the New York Times reported that “in numerous opinions, judges have accused lawyers of processing shoddy or even fabricated paperwork in foreclosure actions when representing the banks.” In both New York and Florida, courts “have begun requiring that lawyers in foreclosure cases vouch for the accuracy of the documents they present,” which “could open lawyers to disciplinary actions that could harm or even end careers.” Stephen Gillers, an expert in legal ethics at New York University, told the Times, “when ... it turns out there are documents being given to the courts that have no basis in reality, the profession gets a very big black eye.” The bar association is, understandably, up in arms over the requirement.

Last week, in response to a class action suit, GMAC Mortgage thew out approximately 1,000 foreclosure filings in Maryland that had been “verified” – at a rate of as many as 10,000 per week – by infamous robo-signer Jeffrey Stephan. Anthony Depastina, an attorney for Civil Justice, Inc., a public interest law-firm representing the mortgage-holders, explained to AlterNet that in an affidavit, “the signer is supposed to attest that they verified the numbers … they're attesting under the penalties of perjury that the information contained in the affidavit ...are true and accurate. Plus they're supposed to sign it in the presence of a notary.” But in the robosigning scandal, “none of this happened.”

In fact, the Associated Press reported that “financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in 'foreclosure expert' jobs with no formal training.” In depositions reviewed by the AP, “many of those workers testified that they barely knew what a mortgage was. Some couldn't define the word 'affidavit.'"

The Maryland case was the first ever “defensive” class action suit filed. GMAC responded by offering to dismiss the foreclosure proceedings against the homeowner whose case sparked the suit. “We argued that was just an attempt to get around what was right,” said Depastina. “At the end of the day we would have to file on behalf of some other Maryland homeowner after we found there was a falsified affidavit.” GMAC can refile the foreclosures, but they have to start at square one.

Depastina said he expects these issues to extend far beyond the home mortgage industry. It's “only symptomatic of a greater attempt by lending institutions of all types to circumvent the processes set up by the courts, the judiciary and legislatures in an effort just to increase their bottom line,” he said. “And I don't think the foreclosure industry is the only problem – you're going to see it in credit cards, in debt buying, in assignment of debt, in the auto industry... You know, the same individuals signed off on billions of dollars of debt every year. They're supposed to verify all that debt information. Do they verify it? I have my doubts.”

The case came only weeks after the Massachusetts Supreme Court dealt the banks a serious blow in US Bank National Association (as trustee) vs. Antonio Ibanez. The case hinged on whether the banks (the case combined two separate foreclosure proceedings) actually had clear titles for properties they claimed to own.

At the heart of the case was the practice of slicing up and bundling hundreds of loans into investment vehicles – “securitizing” the debt. In the process, loans change hands a lot – they were assigned and reassigned from investor to investor, and a servicer dealt with the homeowners. But along the way, paperwork was required by law each time the mortgage changed hands. When the banks showed up to to foreclose, they didn't have the required chain of title – the court found they were essentially trying to foreclose on properties they didn't own.

The ruling only applied to Massachusetts, but it sent shockwaves across the mortgage industry. According to Harvard legal scholar Adam Levitin, “there are lots of securitization deals where the mortgages might not be enforceable in title theory states like Massachusetts … and that could well be fatal to enforcement of these trusts' mortgages in Massachusetts at the very least, and possibly in” many more states.

Then there is the banks' potentially massive liability stemming from the MERS mess. MERS is a private company established by the banking industry to allow investors to instantly trade debt back and forth. The idea was simple: instead of assigning and reassigning loans and filing the required paperwork with the states, MERS would oversee a database of all of the securitized mortgages in the US – about half of the total number of loans. It would theoretically “own” all the securitized loans, and transfer them within its network instantaneously. The problem is that when a deed changes hands, a recording fee has to be paid to the state or locality where the property is located, and MERS allowed investors to skirt these fees, costing communities untold billions.

Creating a privately operated registry of deeds in order to skirt local filing requirements was a remarkable act of hubris. “Fees are paid for a service performed, and if a document is eliminated because it is no longer necessary, no fee is due because there is nothing to record,’’ reads a statement on the MERS Web site. But that's nonsense; when a state charges a $50 filing fee, it doesn't represent the cost of the piece of paper. Those fees make up the revenues that finance state and local government and all the services they provide.

But the key point is that they're required to file those documents by law, a law the home loan industry believes doesn't apply to mortgage-lenders. Now they face not only investigations by all 50 state attorneys general, but potentially a wave of lawsuits from investors who may claim that the losses they took on these mortgage backed securities weren't just the product of the market's ups and downs, but a consequence of widespread misrepresentation on the part of Big Finance.

But the damage is, unfortunately, in no way being contained on Wall Street. According to data compiled by Housing Wire, the robo-signing boondoggle is largely responsible for a 50 percent drop in the number of foreclosures being completed over the past few months, shifting 250,000 from 2010 to 2011. It's good for those homeowners to stay in their places for another year, but potentially disastrous for the economy to have a large overhang of distressed properties weighing down the market. According to an analysis by Barclay's Capital, cited by Housing Wire, “If the worst happens... [if] widespread issues are found throughout the process and foreclosures are not allowed to be carried out, the damage could mean frozen home sales and new lending nationwide.”

In other words, the uncertainty around these chains of ownership may add to the “shadow inventory” of distressed properties that will come onto the market at some point down the road, a number estimated to be as high as seven million homes.

There are also untold numbers of homes that the banks are simply walking away from. Just as many homeowners have seen the value of “strategically defaulting” on their loans, these are properties so far under water that lenders have no financial incentive to take possession of and maintain them until they can be sold. A study conducted in Chicago by the Woodstock Institute, an advocacy group, found 1,896 “red flag” homes in the city that appeared to have been abandoned by loan servicers. The properties were disproportionally located in already distressed low-income communities.

Woodstock Institute VP Geoff Smith told AlterNet that the abandoned properties “add to the destabilization of these neighborhoods. They further effect surrounding property values.” He added that from the city's perspective, “a lot of times they have to step in and secure these properties because nobody else will. That's a cost to the city there. If there's criminal activity, the city has to respond, adding to the cost. They have to demolish these properties in many cases, again adding to the cost for the city. All of this is an extra layer of impact for communities that are already experiencing some distress.”

According to Smith, the issue “raises questions about servicer accountability. How are [they] accountable for the decisions they make and the impact those decisions have on communities? If it's not in their economic interests to take possession of the properties, then how does that effect the community” as a whole?”

The answer is that the consequences are disastrous, which may in turn provide the argument that the mortgage industry will use to seek judicial relief from the mess it created. It's a good bet that they will once again claim they are “too big to fail” – or too big to bear the brunt of widespread litigation on the part of struggling homeowners, investors and state governments.

It would be scandalous to reward the lending industry with an effective pardon for its wanton, fraudulent practices. The good news is that the banksters face a much steeper climb this time around. In October, only 26 percent of the public said that George W. Bush's Wall Street bailout was “good for the country, and disapproval spanned the political spectrum.

So defeating a judicial bailout for the loan industry should be a winnable fight against an opponent that the public views as a toxic influence on the economy. Back in November, rumors floated around about a potential “MERs whitewash bill” that would immunize the firm from lawsuits, but such a bill never materialized in Congress. Reaction to the trial balloon was swift and angry, and nobody on Capitol Hill has dared to introduce such a measure.

If a judicial fix ends up being debated, the outcome will likely be determined by which side wins the battle of narratives. The lending industry will say that it's necessary to keep the Main Street economy afloat. In order to defeat that message, opponents need to repeat a simple mantra: No more bailouts for Wall Street.

January 14, 2011

Foreclosures are expected to peak while prices bottom out in 2011 as the nation's housing crisis trudges into its fifth year.

Lenders repossessed more than 1 million homes in 2010, and foreclosures could rise by 20 percent this year. (photo by Flickr user BasicGov)

Lenders repossessed more than 1 million homes in 2010, up 14 percent from the previous year and the most since 2005, according to a report released Thursday by RealtyTrac, a California-based company that tracks the foreclosure market.

“We will peak in foreclosures and probably bottom out in pricing, and that’s what we need to do in order to begin the recovery,” Rick Sharga, RealtyTrac’s senior vice president, said in an interview at Bloomberg headquarters in New York. “But it’s probably not going to feel good in the process.”

Foreclosures could rise by 20 percent this year while prices will likely drop by 5 percent as the market begins to make a turn toward recovery, Sharga said.

Housing market analysts expect it will take a minimum of two years for the market begin recovering and possibly as many as five years before the recovery roots. Foreclosures are expected to remain high as homeowners contend with stubborn unemployment, tougher standards to get a loan and falling home values.

A record 2.9 million households, or one in 45, received notices of default, auction or repossession in 2010, up about 2 percent from the prior year.

In December, 257,747 homes received at least one foreclosure-related notice, the lowest monthly total in 30 months. The number of notices fell 1.8 percent from November and 26.3 percent from December 2009, RealtyTrac said.

The slowdown during the last couple of months of they year is likely the result of major lenders halting foreclosures while they reviewed their processes and problems with robo-signers, those who signed off on paperwork without closely reviewing documents.

Upward of 250,000 foreclosure filings were delayed at the end of the year because of investigation into bank practices, according to RealtyTrac.

Attorneys general in all 50 states are investigating problems with the process. Firms including JPMorgan Chase & Co., Bank of America Corp. and Ally Financial Inc. halted some repossessions as they reviewed their procedures.

Most banks have restarted the process, which could create a spike of foreclosures during the first three months of 2011, according to the report.

About 3 million homes have been repossessed since the housing boom ended in 2006, and that could rise to about 6 million by 2013, according to Sharga.

About 5 million borrowers are at least two months behind on their mortgages and more will miss payments as they struggle with job losses and loans worth more than their home's value, industry analysts forecast.

Price drops will force more borrowers under water on their mortgages with about 20 percent already owing more than their homes are worth.

Five states — California, Florida, Arizona, Illinois and Michigan — accounted for 51 percent of the filing total.

Georgia, Texas, Ohio, Nevada and New Jersey rounded out the top 10 for foreclosures, according to RealtyTrac.

December 21, 2010

More than 29,000 troubled American homeowners have been stuck in mortgage modification purgatory for at least a year, with no end in sight, under the Obama administration's anti-foreclosure program, according to a recently released report from a watchdog panel appointed by Congress.

These homeowners were supposed to receive lower payments on a trial basis lasting three months and then gain so-called permanent mortgage modifications--lowered payments lasting five years. But more than a year after beginning their trial phase, they have yet to be granted the permanent relief, leaving them unsure about their ability to hang on to their homes. Meanwhile their lenders continue to report them to credit bureaus as delinquent, impairing their ability to borrow in the future.

The new data, disclosed last week in a report from the Congressional Oversight Panel, added the latest sign of trouble to an anti-foreclosure program that was once supposed to help 3 to 4 million hang on to their homes. It is now on track to aid less than one-fourth that number.

The homeowners stuck waiting for permanent relief now contend with a higher cost of living thanks to lower credit scores and higher mortgage debt. They're also prevented from moving on as they try to keep a mortgage teetering on the verge of foreclosure.

"It's horrifying, but it's not surprising," said Diane E. Thompson, counsel to the National Consumer Law Center. "I hear about this everyday from people. When I go out to do trainings, I have people put their hands up in the room and I try to think of prizes for the person who has the oldest trial mod, and they're routinely 18 months old."

Twenty-eight homeowners who entered the program in March 2009, or more than a year-and-a-half ago, remain in the trial phase. Some 475 have been in trial limbo for 18 months. More than 29,100 borrowers have been stuck in the trial phase for at least a year, data through October show.

"After promises of hope, the fact that so many families remain in financial limbo goes to the heart of our biggest concern: some mortgage servicers on their own simply seem not to be up to the task of effective, widespread mortgage modification," said Richard H. Neiman, New York's top bank regulator and a member of the oversight panel. Neiman added that "Treasury has not been able to hold them fully accountable."

While the Treasury Department discloses the number of homeowners who have been in the trial program for at least six months, Treasury has never revealed the number of borrowers who have been in the trial phase for at least a year. Bank of America, the nation's largest bank by assets, accounted for nearly half of all the aged trials, according to Treasury's latest publicly-released scorecard.

Thompson said the number of homeowners stuck in limbo is likely much higher as mortgage firms self-report their data to Treasury, and are likely to skew the numbers in their favor.

The modification initiative, known as HAMP, long ago was dismissed by housing experts as a failure.

More homeowners have been bounced from the program than have received permanent relief.

The average borrower lucky enough to get into a five-year plan ends up owing more on their mortgage than they did prior to entering the program. Research shows that homeowners in this state, known as being underwater, are less likely to move--such as in pursuit of a job--and more likely to default.

And more than a third of those in so-called permanent mortgages spend more than 80 percent of their monthly income servicing debt, raising questions about the long-term sustainability of the modifications.

The oversight panel said HAMP would prevent less than 800,000 foreclosure, at a cost of about $4 billion. The administration originally allocated $50 billion in bailout funds to help homeowners.

Last week, the Treasury Department official overseeing its bailout programs admitted for the first time that the mortgage modification initiative will not meet the goal laid out by President Obama when he announced the program in February 2009. Then, Obama said it would enable "as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure."

"I think it's apparent from our numbers that we will not have 3 to 4 million" permanent modifications, said Tim Massad, Treasury's acting assistant secretary for financial stability.

More than 2.8 homes received foreclosure notices last year, according to real estate data provider RealtyTrac. The Federal Reserve expects 7.4 million homes to enter foreclosure this year through 2012. It recently revised its projection up from 6.5 million as the crisis has worsened.

Treasury officials say the program's shortcomings are due to mortgage firms' inability to handle the huge influx of distressed borrowers that flooded the system when the housing market soured; the changing nature of the housing crisis, which was once dominated by subprime mortgages and now remains depressed due to a lingering high unemployment rate; and borrowers' lack of maintaining proper documentation describing their circumstances, like monthly income.

To deal with the borrower issue, Treasury redesigned the program to require documentation in order to enter the trial phase, rather than the previous practice of rushing to get homeowners enrolled in the program and asking for their paperwork later.

Treasury maintains that this has led to better results.

But according to the oversight panel's data, nearly 30 percent of borrowers who made their first trial payment in June--and made their payments on time in July, August and September--remain in the trial phase. A little more than half actually converted into a permanent modification, making it the only month dating to March 2009 in which the conversion rate eclipsed 50 percent, data show.

Andrea Risotto, a Treasury Department spokeswoman, cautioned that there is some lag between when a decision on a permanent modification is reached and when that is entered into the system.

Still, Treasury officials argue that even with homeowners remaining in limbo, they're still benefitting from the program as they're able to continue living in their homes, at a reduced rate, and without cost to taxpayers (the initiative only pays for permanent modifications).

"The trial period provides immediate relief to struggling homeowners at no expense to taxpayers," Risotto wrote in an e-mail. She added that Treasury data show that a majority of borrowers rejected during the trial phase end up in alternative foreclosure-prevention programs.

Thompson, who works with homeowners and their advocates, completely disagreed.

"The big overarching thing is, nobody wants to be in a trial mod. Everyone wants resolution in their lives," she said. "Everyone in foreclosure is desperate to get out of foreclosure. It's incredibly stressful, it's humiliating, and shameful. Nobody feels good about it. People want it done, they want it over with, they want to be able to move on."

Also, even though the homeowners are making their payments, they're still being reported as delinquent to the major credit reporting bureaus, Thompson said.

"So think about what that does when they go to apply for a car, or what it does to their credit card rates, or if they're applying for a job, or want to move, or even want to rent a place," she said. "It affects their cost of living and their ability to manage their life in all sorts of ways. Credit is a huge issue."

Finally, when homeowners are in the trial phase their mortgage company tacks on to their mortgage principal the difference between their old monthly payment and the reduced amount. The longer the trial, the more gets added.

Thompson said that for some of these homeowners, that tacked-on amount is enough to tip the scales against a permanent modification when their mortgage company finally decides to run the formula that determines whether they keep their home, or are forced out. A bigger debt load works against homeowners, she added.

December 20, 2010

Dec. 18 (Bloomberg) -- Bank of America Corp. was sued by Arizona and Nevada over home-loan modification programs intended to keep homeowners who borrowed from its Countrywide mortgage unit out of foreclosure.

Instead of working to modify loans on a timely basis, Bank of America proceeded with foreclosures while borrowers' requests for modifications were pending, a violation of a 2009 agreement with Arizona to help borrowers facing the loss of their homes, Terry Goddard, the state's attorney general, said yesterday in a statement.

“We are disappointed that the suit was filed at this time,” Dan Frahm, a Bank of America spokesman, said in an e-mail, referring to the Arizona suit. “We and other major servicers are currently engaged in multistate discussions led by Attorney General Miller in Iowa to try to address foreclosure related issues more comprehensively.”

All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. The probe, announced Oct. 13, came after JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC mortgage unit said they would stop repossessions in 23 states where courts supervise home seizures, and Bank of America, the largest U.S. lender, froze foreclosures nationwide.

Misleading Consumers

The bank is accused in the Arizona and Nevada lawsuits filed yesterday of misleading consumers about requirements for the modification program and how long it would take for requests to be decided. The bank provided inaccurate and deceptive reasons for denying modification requests, according to the suits.

A consent judgment in March 2009 to resolve an Arizona lawsuit alleging Countrywide engaged in fraud while originating and marketing loans required the company to create a loan modification program for some former Countrywide borrowers in Arizona. Bank of America, which acquired Countrywide in July 2008, assumed responsibility for Countrywide's compliance with the consent judgment, Goddard said.

Bank of America has completed 750,000 loan modifications nationwide, including 30,000 in Arizona and 20,000 in Nevada, Frahm said. He said the company has built four assistance centers in those states, held numerous outreach events, and developed special programs to address the hardest-hit populations.

The Arizona lawsuit, filed in state court in Phoenix, seeks a court order holding the Charlotte, North Carolina-based bank in contempt for violating the agreement and requiring it to pay as much as $25,000 for each violation of the accord plus as much as $10,000 for each violation of the state's consumer-fraud law.

December 17, 2010

Are you one of the lucky ones? Have a good job, live in a nice neighborhood, enjoy your cozy home? Think foreclosure only impacts the reckless or the unemployed?

Think again.

George Mahoney worked and saved and built his cozy colonial-style home in Lynnfield, Massachusetts in 1981. There, he and his wife raised three lovely daughters. For many years, the Mahoneys paid down their relatively small mortgage with their local bank -- a division of Bank of America (BofA). In 2007, they took out a second mortgage to help a daughter start a small business. Two wage earners, a great credit record -- the loan was a breeze. That was when the trouble began.

About a year after getting the second mortgage, BofA started notifying George that his payments were late. Soon they jacked his credit card interest rates from seven percent to twenty-eight percent. Next, they ruined his credit record. His Sears card dropped from a $10,000 limit to a $500 dollar limit. Then one day in the fall of 2009, BofA initiated foreclosure on the house he had built and owned for 28 years.

The only problem? The Mahoneys had never missed a single payment on either their first or second mortgage.

Initially, George thought the problem would be easy to fix. He went down to his local branch to get help, but the local employees were rebuffed by corporate headquarters. So he started getting a receipt for each mortgage payment and faxing it to BofA headquarters. He also started the first of thousands of calls. Usually, BofA staff would readily concede that he was right. But even if they initiated a "fix" it never lasted more than 90 days, when the saga would start over again. In the last few years, he has received foreclosure notices twice - most recently in October 2010.

"Banks shouldn't be allowed to ruin people's lives this way. My stress level for the past year and a half has been a 10 and my wife is a wreck," George explained. His wife, Marianne, confirms the toll the trial has taken on the family. "The whole thing is a nightmare. The stress we live under is unbearable and it's embarrassing too. No one can help us, no one can do anything and it's ruined our credit. I have always been proud to have perfect credit," she adds, the strain evident in her voice.

After receiving a foreclosure notice in October, hiring a lawyer to send urgent letters to BofA and even after repeated talks with top-level staff in the office of BofA President and CEO, Brian Moynihan, the Mahoneys are still in jeopardy.

Bank of America Fraudclosure Central?

Recently-released data from the Federal Reserve shows that BofA received almost one trillion dollars ($931 billion) in taxpayer assistance during the financial crisis. The Fed has also been investigating snowballing allegations of fraud in the foreclosure process, allegations that include false notarizations, false affidavits, accounting fraud, abusive fees, false practice of the law and more. Fed Board Governor Daniel Tarullo told Congress that the problems identified "raise significant reputation and legal risk for the major mortgage servicers... requiring immediate remedial action." But will it come in time to aid the Mahoneys?

The Mahoney's experience indicts endemic accounting problems at BofA. Payments are misapplied constantly and the default position is abusive foreclosure. The bank reports some 1.3 million customers behind on their payments, but can regulators trust any data coming out of BofA? How many of these people are trapped in the same hell as the Mahoneys?

In a lengthy interview with the New York Times this weekend, Brian Moynihan reviews his first year as BofA chief. "I feel proud of what we have done," he said. "You never want to have a customer feel that something isn't right." But given BofA's track record, Moynihan's cheerful "there is not a better job in the world!" tenor strikes a surreal note.

Help May Be on the Way

On Tuesday, Iowa Attorney General Tom Miller, leader of the 50-state task force on mortgage fraud, met with more than 100 people from 15 states. In the crowd were representatives from community, faith, and labor organizations, foreclosure victims and struggling homeowners from across the country.

Led by the feisty folks at PICO National Network, National People's Action and Iowa Citizens for Community Improvement, the participants presented Miller with hundreds of case files documenting foreclosure fraud, abuse and plain malfeasance.

The group burst into a spontaneous round of applause when Miller said in no uncertain terms: "We will put people in jail." Miller also said he supports a settlement with the big banks that requires significant principle reductions, loan modifications, and compensation for victims -- key demands of the community groups.

As the holidays approach, too many Americans will be losing their homes because of hard times. An untold number will be losing their home due to the fraudulent behavior and stark indifference of the nation's largest bailout-out banks. Let's hope the Mahoneys are not among them.

December 16, 2010

Banks have started foreclosures on more than 2,500 homeowners still in the process of applying for mortgage modifications, according to a new survey of 96 consumer attorneys.

"People every single day are being put into foreclosure while they're waiting for modifications," said Ira Rheingold, director of the National Association of Consumer Advocates, which conducted the survey in November with the National Consumer Law Center. "It's all related to the broken mortgage servicing system."

The mortgage-servicing system found itself in the spotlight this fall when employees at big banks admitted in sworn depositions to signing off on foreclosure filings without verifying any of the information. Banks and the government have insisted it's just a paperwork problem and no homeowners have been harmed.

Rheingold and other consumer attorneys argued that the unverified documentation is yet another symptom of a system that routinely seizes homes under false pretenses.

"I'm not sure whether it's incompetence or intentional venality," Rheingold said. "The fact they can't modify someone's loan and at the same time stop a foreclosure is ridiculous."

Banks are required to evaluate all delinquent borrowers for the Obama administration's Home Affordable Modification Program, its signature foreclosure-relief effort, and to solicit applications from borrowers who meet eligibility requirements. The program drastically reduces monthly payments for eligible borrowers, but more have been bounced from HAMP than have received "permanent" five-year modifications.

Homeowners are often shocked and confused when they discover that after they've been encouraged to apply for a modification, the foreclosure process has continued -- even though a directive from the Treasury department this year forbade servicers from proceeding with foreclosures on HAMP applicants. The Treasury Department has not punished any servicers for breaking the program's rules, though a watchdog report released this week said Treasury is considering witholding incentive payments for 132 modified loans. Most of the lawyers said their clients had been making payments exactly as they'd been told to by their bank.

Wednesday's report "means there's massive noncompliance with HAMP because there's no enforcement mechanism," said Diane Thompson, an expert on mortgage servicing and a lawyer for the NCLC.

The 96 attorneys said they represent more than 1,200 homeowners "who had been placed into foreclosure due to misapplication of payments, improper fees, or force-placed insurance," according to the survey.

"I was surprised at how large the numbers were in every category," Thompson said. "From not very many attorneys we get more than a thousand homeowners in every category being put into foreclosure wrongly."

Banks have scrambled America's system of private property ownership to the point that no one knows who owns what.

"For the first time in the nation's history, there is no longer an authoritative, public record of who owns land in each county." -- University of Utah law professor Christopher Peterson

There is an unbelievable scandal in the making that threatens to subvert our four-century-old method for guaranteeing a fundamental building block of the American republic—property ownership. The biggest reason why you probably haven’t heard much about it is that it involves one of the most generic and boring company names imaginable: Mortgage Electronic Registration Systems, Inc., or MERS. It is a story of deception engineered at the highest level of power for short-term gain, and another epic failure of the private sector to uphold the laws and traditions of American society, even something as fundamental as property rights.

Created in 1995 by the country's biggest banks, MERS quietly took control of and privatized mortgage record-keeping across the country and, in the span of a few years, scrambled America's private property ownership records to the point where no one could figure out who owns what. This was no accident, and was done by design: MERS was a tool used by America's top financial institutions to pump up the real estate market. Mortgage-backed securities, robo-signers, lightning quick foreclosures, subprime mortgages and just about everything else that went into feeding the biggest real estate bubble in U.S. history could not function without help from MERS. But unlike many of the Wall Street scandals, this one could blow up in the banks’ faces, with the little guy laughing all the way back to his free McMansion, and local governments seeing their empty coffers fill back up with the billions of dollars in unpaid fees that MERS circumvented.

The story begins in mid-'90s with the founding of MERS, Inc. by the nation's most powerful banks, ostensibly with the aim of streamlining and modernizing the process of registering and tracking mortgages. Traditionally, there has been no centralized registry of real estate ownership information, with counties maintaining their own records for properties within their borders—a system that has remained virtually unchanged since colonial times.

The MERS database went live in the middle of the dot-com bubble, and was supposed take inefficient government bureaucracies kicking and screaming into the future by providing a centralized, national registry of mortgage ownership information. "MERS addresses a problem that was costing the industry a significant amount of money," Rick Amatucci, a Fannie Mae vice president and the agency's liaison with MERS, told Mortgage Banking magazine, just as the new registry went online in 1997. The database would give lenders across the country instant access to real-time mortgage information, diminish potential for fraud, and lower costs for servicers and borrowers, according to Mortgage Banking Association, which was tasked with overseeing the project.

But that kind of talk was just for the press release. The banking industry wasn't concerned with efficiency or transparency or the greater good. It was all about making money, as quickly and cheaply as possible. And that is what MERS was for. It was created to help the industry push its latest money-maker: mortgage-backed securities, a Wall Street financial scam that dressed up the most toxic, guaranteed-to-fail loans as Grade A investment vehicles that could be sold to suckers looking for an easy gain.

But before mortgage-backed securities could be unleashed on the residential housing market on a massive scale, bankers needed to get rid of America's long-standing real estate recording laws, which required lenders to file all mortgage transactions—the origination of a new loan, for instance, or the transfer or sale of a mortgage between banks—with the county in which the property is located. While this recording requirement was not a problem in the sleepy pre-securitization days of the home loan business, when mortgage transactions were kept to a minimum, it was going to be much more difficult—if not impossible—with widespread use of securitization, which jacked up the industry like high-grade meth. Mortgages would be changing hands dozens of times, going from loan originators to banks to Wall Street investment houses, which would collect them by the thousands and package them into complex debt instruments that would be chopped up into shares and sold off to multiple investors all over the world.

Bankers needed a quick, clean way of reassigning mortgages without having to go through the "cumbersome" process of recording them with county courts and recorder offices. But instead of working with municipalities to modernize title registration by a creating a national database that was aboveboard and that everyone could use, the banking industry did what it does best: hid the information with sly accounting tricks.

And it succeeded. In just a few short years, MERS took over the bulk of residential mortgage registration. There are about 80 million residential mortgages in America today, and MERS tracks 60 percent of them.

November 15, 2010

Retired judges are rushing through complex cases to speed foreclosures in Florida

Illustration by Victor Juhasz

By Matt Taibbi

Nov 10, 2010 2:25 PM EST

The following is an article from the November 11, 2010 issue of Rolling Stone.

The foreclosure lawyers down in Jacksonville had warned me, but I was skeptical. They told me the state of Florida had created a special super-high-speed housing court with a specific mandate to rubber-stamp the legally dicey foreclosures by corporate mortgage pushers like Deutsche Bank and JP Morgan Chase. This “rocket docket,” as it is called in town, is presided over by retired judges who seem to have no clue about the insanely complex financial instruments they are ruling on — securitized mortgages and laby­rinthine derivative deals of a type that didn’t even exist when most of them were active members of the bench. Their stated mission isn’t to decide right and wrong, but to clear cases and blast human beings out of their homes with ultimate velocity. They certainly have no incentive to penetrate the profound criminal mysteries of the great American mortgage bubble of the 2000s, perhaps the most complex Ponzi scheme in human history — an epic mountain range of corporate fraud in which Wall Street megabanks conspired first to collect huge numbers of subprime mortgages, then to unload them on unsuspecting third parties like pensions, trade unions and insurance companies (and, ultimately, you and me, as taxpayers) in the guise of AAA-rated investments. Selling lead as gold, shit as Chanel No. 5, was the essence of the booming international fraud scheme that created most all of these now-failing home mortgages.

The rocket docket wasn’t created to investigate any of that. It exists to launder the crime and bury the evidence by speeding thousands of fraudulent and predatory loans to the ends of their life cycles, so that the houses attached to them can be sold again with clean paperwork. The judges, in fact, openly admit that their primary mission is not justice but speed. One Jacksonville judge, the Honorable A.C. Soud, even told a local newspaper that his goal is to resolve 25 cases per hour. Given the way the system is rigged, that means His Honor could well be throwing one ass on the street every 2.4 minutes.

Foreclosure lawyers told me one other thing about the rocket docket. The hearings, they said, aren’t exactly public. “The judges might give you a hard time about watching,” one lawyer warned. “They’re not exactly anxious for people to know about this stuff.” Inwardly, I laughed at this — it sounded like typical activist paranoia. The notion that a judge would try to prevent any citizen, much less a member of the media, from watching an open civil hearing sounded ridiculous. Fucked-up as everyone knows the state of Florida is, it couldn’t be that bad. It isn’t Indonesia. Right?

Well, not quite. When I went to sit in on Judge Soud’s courtroom in downtown Jacksonville, I was treated to an intimate, and at times breathtaking, education in the horror of the foreclosure crisis, which is rapidly emerging as the even scarier sequel to the financial meltdown of 2008: Invasion of the Home Snatchers II. In Las Vegas, one in 25 homes is now in foreclosure. In Fort Myers, Florida, one in 35. In September, lenders nationwide took over a rec­ord 102,134 properties; that same month, more than a third of all home sales were distressed properties. All told, some 820,000 Americans have already lost their homes this year, and another 1 million currently face foreclosure.

Throughout the mounting catastrophe, however, many Americans have been slow to comprehend the true nature of the mortgage disaster. They seemed to have grasped just two things about the crisis: One, a lot of people are getting their houses foreclosed on. Two, some of the banks doing the foreclosing seem to have misplaced their paperwork.

For most people, the former bit about homeowners not paying their damn bills is the important part, while the latter, about the sudden and strange inability of the world’s biggest and wealthiest banks to keep proper records, is incidental. Just a little office sloppiness, and who cares? Those deadbeat homeowners still owe the money, right? “They had it coming to them,” is how a bartender at the Jacksonville airport put it to me.

But in reality, it’s the unpaid bills that are incidental and the lost paperwork that matters. It turns out that underneath that little iceberg tip of exposed evidence lies a fraud so gigantic that it literally cannot be contemplated by our leaders, for fear of admitting that our entire financial system is corrupted to its core — with our great banks and even our government coffers backed not by real wealth but by vast landfills of deceptively generated and essentially worthless mortgage-backed assets.

You’ve heard of Too Big to Fail — the foreclosure crisis is Too Big for Fraud. Think of the Bernie Madoff scam, only replicated tens of thousands of times over, infecting every corner of the financial universe. The underlying crime is so pervasive, we simply can’t admit to it — and so we are working feverishly to rubber-stamp the problem away, in sordid little backrooms in cities like Jacksonville, behind doors that shouldn’t be, but often are, closed.

And that’s just the economic side of the story. The moral angle to the foreclosure crisis — and, of course, in capitalism we’re not supposed to be concerned with the moral stuff, but let’s mention it anyway — shows a culture that is slowly giving in to a futuristic nightmare ideology of computerized greed and unchecked financial violence. The monster in the foreclosure crisis has no face and no brain. The mortgages that are being foreclosed upon have no real owners. The lawyers bringing the cases to evict the humans have no real clients. It is complete and absolute legal and economic chaos. No single limb of this vast man-­eating thing knows what the other is doing, which makes it nearly impossible to combat — and scary as hell to watch.

What follows is an account of a single hour of Judge A.C. Soud’s rocket docket in Jacksonville. Like everything else related to the modern economy, these foreclosure hearings are conducted in what is essentially a foreign language, heavy on jargon and impenetrable to the casual observer.

November 08, 2010

Wow! Big news on the foreclosure front. Yesterday, California Attorney General Edmund G. Brown Jr. directed Ally Financial, Inc., formerly known as GMAC, to prove immediately that it is complying with state law or, if it cannot, to cease and desist from foreclosing on California homes. Earlier in the week, GMAC voluntarily halted foreclosures in 23 other states.

All of this occurred after a months old deposition in a foreclosure lawsuit finally made its way into the public view. The deposition proved beyond a shadow of a doubt what I have been saying for months. In many cases, foreclosing entities lack both the legal right and the nominal right to foreclose.

By nominal, I mean they suffer no loss on which a claim can be made. The borrower owes them no money. And the original funder was paid off by credit default swaps and tax payer tarp funds so there is no actual creditor who is entitled to anymore payments or the property. By the long held legal principal of subrogation, the borrower may owe little or nothing. The trusts that held the original notes have been dissolved and in all likelihood the notes were destroyed subsequent to that or more probably, shortly after they were originated.

That is why they can only produce digitized copies. The purpose of requiring the original note is to determine whom, among all of the parties who passed mortgage notes around like a bong at a frat party, is the actual creditor and to get from them a FULL accounting of all of the monies paid in connection with your loan.

The securitization of diced up pools of mortgages has created this and similar problems for all foreclosing entities. People who have already lost their homes to an unlawful foreclosure will have legal standing to demand them back and buyers of these foreclosed properties will make claims against title companies who have nowhere near the reserves to cover the claims. Stay tuned, this is far from over.

Crazy things I was saying a year ago are coming true now. Go back and reread some of my stuff from last fall.

Better yet, come to my Workshop where I will share my incites into the latest news and what it might mean for people attempting to get a loan modification, avoid foreclosure or buy a foreclosure or short sale property. The Temecula Library on October 9th.

I will be talking about recent legal developments. Courts are starting to get it and lenders are starting to get nervous.

They keep saying that people knew what they were getting into when they signed their loan documents.

That’s pure unadulterated bullspit. They never told anyone that the loan they were signing for was based on a 100% over value false appraisal. Nor did they mention that your loan was intended to be part of a pool of loans, which if a certain percent of loans failed they would be paid several times the loan amount for each loan in the pool.

Did you know that people who never loaned a dime were buying an insurance policy on your loan betting that at very least it would be part of a pool that was created with features guaranteeing that it would fail?

Did you know the meaning of Collateralized Debt Obligation, Credit Default Swap, Mezzanine Tranche, Special Purpose Vehicle, Delaware Statutory Trust, Nominee, or that big lenders were doing away with our age old property records and replacing them with private records and in many cases, no records at all?

But to make all of that legalese and obfuscation pay off, the loan pools must fail. The only reason for all of that was to make default way more profitable than loaning money.

For servicers, the incentive to default a borrower is so great that borrowers who have never been late are routinely pushed into default simply by the servicer refusing to credit the payment.

And the incentive to default borrowers is still in place, so if not you, at least your neighbor. They may get around to you yet.

See my blog, come to my workshop, tell a friend. Don’t kid yourself, this is far from over. Our economy cannot recover until we begin to create high value jobs. Absent some huge, and I mean ginormous government works program being created, which I doubt, I can’t see where they are going to come from.

Large companies are sitting on piles of cash and have no intention of hiring workers in America.

That leaves small business. But the impact of foreclosures and years of vacant store fronts don’t bode well for that happening until our local communities stabilize. For the foreseeable future it appears that layoffs to once recession proof jobs such as teachers and police officers are coming.

I have always believed that America is a great country not because of its powerful military but because it was a place of opportunity for people who were ambitious.

At the moment, America’s promise has been choked off by a handful of insiders who diverted our wealth to them. The joke may yet to turn out to be on them. Here in San Diego, where a lot of wealth resides, we cannot afford to fix our potholes and I understand that many financiers have had to forego their Bugattis and Maybachs in favor of more durable vehicles such as the Dartz Prombron Monaco Red Diamond Edition.

At $1.5 million, the price of combining luxury and durability doesn’t come cheap, but according to its promotion it’s,

“Perfect for the urban warrior, this bulletproof SUV is an upgrade from the original 8.1 liter GM V8-powered Dartz Kombat T98.

Debuting at the 2010 Top Marques Monaco show, the most expensive SUV in the world will feature ruby red matte paint, gold-plated bulletproof windows, 22″ Kremlin Red Star bulletproof wheels, tungsten exhaust and a coating of Kevlar.

The badges and dials are made with white gold, diamonds and rubies. It also features a special Vertu mobile phone with an “alert” button and a Rogue Acoustic Audio System. Best of all, the interior is lined with whale penis leather!”

While bullet proofing is included, apparently rust proof undercoating is extra but the interior makes it worth it, don’t you think.

In the meantime, more families will lose their homes to fuel this level of luxury.

By spreading the truth about what happened to our prosperity and sharing strategies to bring real change, we can all make a difference in shaping the America we want for future generations.

Introduce people to my blog. If you know anyone who is being affected by this, have them contact me. Everyone’s story is important and I have learned about patterns of conduct because people from all over the country write to me.

Esperanza Casco who's home in Long Beach was recently foreclosed, speaks at a "Faces of LA's Foreclosure Crisis'' rally in Los Angeles in late October.

Owners thought banks were helping with terms, only to lose their homes

LOS ANGELES — Grocery store owners William and Esperanza Casco were making enough money to stay current on their mortgage, but when JPMorgan Chase & Co. offered a plan that reduced their payments, they figured they could use the extra cash and signed up.

The Cascos say they never missed a subsequent payment, so they were horrified when the bank decided the smaller payments weren't enough and foreclosed on their modest Long Beach home.

Their story is echoed across the country by people who claim — some in lawsuits — that banks didn't live up to their end of the deal when they agreed to trial mortgage modifications.

The suits add to a feeling among many struggling homeowners that they're getting little help from the part of the government's $700 billion Wall Street rescue that aimed to help them directly.

Indeed, Treasury statistics show that only about one-third of the nearly 1.4 million homeowners accepted into the government's payment reduction program over the past year have had their reductions made permanent.

"It is extremely unfair that someone like me and my wife who have owned our home for 17 years and never missed a payment could end up in foreclosure," Casco, 47, said in Spanish through an interpreter.

Chase spokesman Gary Kishner was unable to comment on whether Cascos had been current on their payments but insisted the bank had treated the couple fairly.

"We worked with the borrower to give him as many opportunities as possible to qualify for a modification," he said. "However, they were not able to do so and therefore we were forced to foreclose on the property."

Several federal lawsuits filed in Boston accuse major lenders of breach of contract under the government's Home Affordable Modification Program, in which banks agreed to participate as part of the bank bailout.

The lawsuits say the banks agreed under HAMP to grant permanent mortgage modifications to borrowers who make all payments during trial modifications.

Attorney Shennan Alexandra Kavanagh said several of the plaintiffs lost their homes after their payments reverted to their original sums that they were unable to pay. She said she believes tens of thousands of borrowers in Massachusetts alone could be covered by the suits if they get class-action status.

One of the lawsuits, against Bank of America Corp., was consolidated earlier this month with similar complaints in five other states, Kavanagh said.

Bank of America spokeswoman Shirley Norton said in an e-mail that the lender will continue aggressively defending itself against the cases.

More lawsuits have been filed against other lenders elsewhere.

In San Francisco, the Housing and Economic Rights Advocates legal services group sued Chase, accusing the New York bank of profiting from collecting payments during long trial modifications that ultimately end in foreclosure.

"They're participating in the crisis they had helped to foment by refusing to honor loan modifications they had already agreed to," said attorney James C. Sturdevant, whose firm is assisting in the lawsuit.

Chase's Kishner said he could not comment on the pending litigation.

Joseph R. Mason, a professor at Louisiana State University's business school who has written widely on the subprime lending debacle, said he suspects the loan modification disputes are a legacy of the federal government's rush to stem the flow of foreclosures before it had adequate plans in place.

"These policymakers said, just go out and do this and don't let us worry about the details," he said. "These details are now what are coming to the fore in these modification cases."

Laurie Maggiano, policy director at the Treasury Department's Homeownership Preservation Office, said banks were encouraged to offer trial modifications based on interviews with borrowers about their incomes and expenses while they sorted out the paperwork to qualify for permanently reduced payments.

The banks were under no obligation to make trial modifications permanent until this June, when new regulations stopped loan servicers from offering the trials based on stated income, Maggiano said.

Now, incomes and other details are being fully vetted before trial periods, and borrowers are preapproved for a permanent modification as long as they make three trial period payments, she said.

She also said banks are only obliged to grant modifications if the investors who hold the mortgages also benefit from the modification, as mandated by the October 2008 legislation approving the bailout.

Those explanations provide little comfort to the Cascos.

"I think that banks are playing games with us," William Casco said.

Casco said his monthly mortgage payments to Washington Mutual Inc. went up to $2,765 when he refinanced his home in 2006 to pay for a new a meat counter at his store in the industrial Los Angeles suburb of South Gate.

Chase was in the process of acquiring Washington Mutual in January 2009 when Casco said it sent a note telling him he qualified for a lower forbearance rate. The El Salvador native sent the tax returns and business documents the bank was requesting.

His payment was reduced to $1,250, where it remained for several months until Chase told him to apply for a trial loan modification.

Again, Casco said, he sent Chase the documentation they requested. His payment rose to $2,363 in June, then returned to the forbearance rate in October.

Casco said he continued paying what he was asked until August 2010, when Chase told his family that they were $50,000 behind on their payments and put them into foreclosure.

The home has since been sold and Casco is currently fighting eviction. That has him considering joining an existing lawsuit against the bank or seeking support to file a suit on his own.

"I'm determined to do whatever it takes in order to keep my house," he said. "I feel that a great injustice has been done to my family."

November 07, 2010

The recent belated media attention to the problem of unlawful foreclosures continues to purport several falsehoods.

Most glaring among these are the repeated assertions that only people who “deserve it” suffer foreclosure. The message coming from the industry is to blame the victim by asserting that this problem wouldn’t be happening had the homeowners made their payments.

Never mind the cruel joke that these are the people that caused high unemployment and the collapse of government services while looting the middle class and paying themselves obscene bonuses. This year is expected to be another record for Wall Street bonuses and foreclosures.

Setting aside borrowers who deliberately set out to cheat the system and buy more house then they could afford, what is about to be revealed are the large number of people who have been foreclosed on as part of a systematic fraud, not because they were delinquent.

There are thousands of examples of foreclosures on wrong addresses, wrong parties, homes without loans, homes in a modification program, and the homes of people who never missed a payment. All of that made possible by forged documents and, until recently, with many judges’ support.

But wait, in California and 29 other states, there is no judicial or administrative review, allowing anyone to foreclose on any property without proving their entitlement to do so, to anyone.

Unless the homeowner files an action in court, the foreclosure will occur uncontested. Do not believe for one moment that this easy money has gone unnoticed by organized crime.

That is why the original voluntary foreclosure moratoriums by GMAC, Chase, and Bank of America were declared in only 23 states. In those states, there is some form of legal review. These are the states where it was necessary to create new paperwork to satisfy the judge of their right to foreclose.

In non-judicial foreclosure states, they had no intention of stopping unlawful foreclosures because they met little resistance. By pretending to modify the loan or resolve the mistake, they persuade the homeowner that everything will be fine while continuing to foreclosure without further notice.

Additionally, most media outlets are quoting some industry insiders as saying that this is just a little “paperwork problem” that can be fixed by filing a few more papers. They already tried that, and that is how we got here.

What finally brought this to light were the depositions by a number of foreclosure mill employees who signed hundreds of thousands of documents in which they declared, “Under penalty of perjury…” and then went on to swear that they had personal knowledge of the facts in an affidavit to the court. The depositions reveal that these “robo signers” had absolutely no knowledge of anything they were swearing to.

That isn’t going to go away, except by some sort of judicial fiat that suddenly blesses this conduct retroactively.

If we allow forgery and perjury to go unpunished, the courts will cease to be effective. It will be worth watching to see how this aspect of employee culpability resolves. Keep in mind that we are talking about hundreds of thousands of willful acts by virtually all mortgage servicers, not a single act by a rogue employee.

The lenders say that they will examine their procedures and should be back to foreclosing in two to three weeks. Which begs the question of how they can provide a thorough review of 5 record breaking years of foreclosure files when they could only spend a few seconds examining them in the first place?

And yet, those bogus affidavits are actually irrelevant to the larger issue of what the phony paperwork conceals. Why would they not just submit proper paperwork in the first place?

The answer is that loans that were bundled into pools for the purpose of securitization were never properly transferred. Real estate law, cumbersome though it may be, requires the physical transfer of documents when an interest in the property changes hands. This is known as an assignment.

But, the notes intended for securitization were never endorsed because they were intended to be the security in multiple pools.

Because the assignments were never properly transferred and recorded, the foreclosure mills have tried to go back after the fact and recreate the assignments.

To do that, they needed to “create” all of the missing assignments in the securitization chain.

That required them to design, write and digitally print fictional documents for what would be at minimum four and possibly hundreds of transfers. These would then need to be signed (endorsed) by the transferring party after the fact and then the signature would need to be notarized.

In some cases, the notaries weren’t yet in existence when the signatures were purported to have been witnessed. In other cases, the notaries were in states other than where the document was purported to be signed.

The “Robo Signers” swore it was all correct and true.

Before Wall Street became immune to prosecution, this sort of creation of documents after the fact was considered forgery.

So, all of those so called paperwork errors are really after the fact attempts to paper over a slandered title.

But, suppose we let them get away with it. Just call it a technicality like they have and let it slide.

Judges have reasoned that they can’t simply let a nonpaying borrower have a free house, and have ruled that borrowers have no legal standing to challenge the foreclosing entity to prove, through those assignments, that they are the party entitled to foreclose. That will now change.

Here’s where it gets interesting. Beyond the difficulty in identifying the true creditor is a larger issue of the tax exempt status of the trusts which are purported to hold the notes.

Known as REMICS, under the IRS code, in order to enjoy beneficial tax treatment, the trust (1) must be passive and (2) cannot acquire any new assets 90 days following the trust’s creation.

If the notes were never properly assigned to the trust when it was established, then the trust does not actually own the underlying mortgages. If the trusts receive these assignments (assets) at this time, they would have serious tax consequences. In many cases, the trusts have already been dissolved and the parties satisfied with insurance, (credit default swaps) or tarp funds. Thus, there is no legal creditor who could prove standing to foreclose if courts uphold the law.

So, while the judge may be reluctant to give a homeowner a free home, the only other option is to award it to someone who never loaned a dime and doesn’t lose a penny, and ironically, is the party responsible for engineering the entire economic collapse.

And, if that weren’t bad enough, the other consequence of this so called “paperwork problem” is that if it is not known with certainty who owns the mortgage in question, it cannot be released. If the title company is not satisfied that there is a good release on the old mortgage, it will refuse to insure the new mortgage.

Recent buyers of foreclosures and short sales may have bought into more than they bargained for. And, because this is about what is missing rather than part of the record, the only conceivable way to know if there is good title is to go to a title company other than the one that insured the buyer’s title and ask for a quote to insure the title in light of these developments. If they can’t track all of the assignments, they will either not insure the title or attempt to exclude or “write around” the missing assignments. The rush, by pretender lenders to foreclose on American homeowners is the final piece of an extraordinary plan. It is an effort to eliminate the evidence of the greatest financial fraud in history. That is what the next few months will reveal as more and more media are forced to confront the facts. The so called examination by the Bankstas is but another unabashed lie from people with a history of doing nothing but telling lies.

Finally, it is apparent from the email I am receiving that foreclosure sales are going forward despite the self-imposed moratorium. The reason being given is that these properties were too far along in the process to halt the auction. But, the law is the law and those individuals will have a claim. Now, it will be interesting to watch as, one by one, homeowners simply stop making their loan payments as they come to realize the significance of these revelations. In those states they will still need a lawyer. The surest way to stop the foreclosure and get to the discovery needed to prove other claims is most likely through a quiet title action. I’m currently digging deep in this area. Please keep in mind that I am not a lawyer and do not give legal advice.This is one of the most complicated and unrewarding areas of practice and few attorneys have any understanding of the complexities.

In the course of more than probably 50 articles on this topic, I have amassed a lot of information that hasn’t made it into print. In that regard, I am prepared to talk in more detail if there are implications for your situation. Hopefully this will be of assistance to you in evaluating lawyers to represent you. Feel free to contact me with your questions. The best way is by email. Give me a synopsis of the question. Then, if we need to talk in more detail we can do that on a land line. My goal, as always, is to educate and inform. If enough people understand the truth, not the nonsense we have been hearing, we can do something about this. Just because a handful of people tried to steal all the money for them is no reason to let them continue or to let them illegally seize what could be as many as 15 million homes when the dust finally clears. Where they will live when their house is gone, how they will work when their job is gone, where they will learn when the school is closed, who will treat them when the clinic is shuttered, and what they will eat are the next wave of problems we will need to address. With what?

Governments at all levels have already spent the taxes that future generations have yet to pay…and there is nothing left. I’m the most upbeat, and positive person you will ever meet, but as a writer and researcher I believe one thing with every fiber of my being…we are headed for some unprecedented change and it won’t be brought about by politicians but by the unintended consequences of their complicity in Wall Streets attempt to steal anything that isn’t tied down.

The most recent announcements by the Bankstas should be seen as a clear signal that they will keep doing this until they are stopped.

The mood at the moment is that little will come of all of the probes and investigations but I do not know of any way that this can continue to be hidden.

Rewritten bankruptcy provisions reduce indebted homeowners to servitude. What has become of the rule of law in the US?

by Joseph E. Stiglitz

The mortgage debacle in the United States has raised deep questions about "the rule of law", the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America, in the wake of the subprime mortgage crisis, it has done neither.

Part of the rule of law is security of property rights - if you owe money on your house, for example, the bank can't simply take it away without following the prescribed legal process. But in recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houseseven when they have no debts.

To some banks, this is just collateral damage: millions of Americans - in addition to the estimated 4 million in 2008 and 2009 - still have to be thrown out of their homes. Indeed, the pace of foreclosures would be set to increase - were it not for government intervention. The procedural shortcuts, incomplete documentation and rampant fraud that accompanied banks' rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess.

To many bankers, these are just details to be overlooked. Most people evicted from their homes have not been paying their mortgages, and, in most cases, those who are throwing them out have rightful claims. But Americans are not supposed to believe in justice on average. We don't say that most people imprisoned for life committed a crime worthy of that sentence. The US justice system demands more, and we have imposed procedural safeguards to meet these demands.

But banks want to short-circuit these procedural safeguards. They should not be allowed to do so.

To some, all of this is reminiscent of what happened in Russia, where the rule of law - bankruptcy legislation, in particular - was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality is at a higher level. It is not particular judges that are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called "corruption, American-style".

It was widely known that banks and mortgage companies were engaged in predatory lending practices, taking advantage of the least educated and most financially uninformed to make loans that maximized fees and imposed enormous risks on the borrowers. (To be fair, the banks tried to take advantage of the more financially sophisticated as well, as with securities created by Goldman Sachs that were designed to fail.) But banks used all their political muscle to stop states from enacting laws to curtail predatory lending.

When it became clear that people could not pay back what was owed, the rules of the game changed. Bankruptcy laws were amended to introduce a system of "partial indentured servitude". An individual with, say, debts equal to 100% of his income could be forced to hand over to the bank 25% of his gross, pre-tax income for the rest of his life, because the bank could add on, say, 30% interest each year to what a person owed. In the end, a mortgage holder would owe far more than the bank ever received, even though the debtor had worked, in effect, one-quarter time for the bank.

When this new bankruptcy law was passed, no one complained that it interfered with the sanctity of contracts: at the time borrowers incurred their debt, a more humane - and economically rational - bankruptcy law gave them a chance for a fresh start if the burden of debt repayment became too onerous.

That knowledge should have given lenders incentives to make loans only to those who could repay. But lenders perhaps knew that, with the Republicans in control of government, they could make bad loans and then change the law to ensure that they could squeeze the poor.

With one out of four mortgages in the US under water - more owed than the house is worth - there is a growing consensus that the only way to deal with the mess is to write down the value of the principal (what is owed). America has a special procedure for corporate bankruptcy, called Chapter 11, which allows a speedy restructuring by writing down debt, and converting some of it to equity.

It is important to keep enterprises alive as going concerns, in order to preserve jobs and growth. But it is also important to keep families and communities intact. So, America needs a "homeowners' Chapter 11".

Lenders complain that such a law would violate their property rights. But almost all changes in laws and regulations benefit some at the expense of others. When the 2005 bankruptcy law was passed, lenders were the beneficiaries; they didn't worry about how the law affected the rights of debtors.

Growing inequality, combined with a flawed system of campaign finance, risks turning America's legal system into a travesty of justice. Some may still call it the "rule of law", but it would not be a rule of law that protects the weak against the powerful. Rather, it would enable the powerful to exploit the weak.

In today's America, the proud claim of "justice for all" is being replaced by the more modest claim of "justice for those who can afford it". And the number of people who can afford it is rapidly diminishing.

October 30, 2010

All indications are that the electorate, fed up with the way things are going in Washington, will vote the Democrats out and Republicans in next Tuesday. Does this make any sense? Shouldn't we stop and ask ourselves why there has been so little progress in Washington? Republicans in the Senate voted "No" on virtually every piece of legislation Democrats brought forth. They filibustered anything and everything on the theory that nothing would get done, people would get dissatisfied and vote out the people who were trying to accomplish something and vote in the party who obstructed every attempt at progress. Sure enough, it appears that they were right. People dissatisfied with a lack of progress are about to vote into office the very party responsible for that lack of progress. Is this insane or what?

Does the voting public even look beneath the surface as to what's going on in Washington? If so they would surely have seen that the Republican strategy was and is to defeat Obama at every turn regardless of how much good his policies would be for the country. Obama certainly doesn't have all the answers and his big mistake, in my opinion, was to cater too much to Republicans and conservatives in the first place. In the prevailing climate the notion of bipartisanship is a joke. Republicans and some Democrats are so venal and self-serving that their only goal is to serve their corporate masters and lap up their financial rewards when they leave Congress to become lobbyists. Obama watered down many of his initiatives in the hopes of winning over some Republcicans. It didn't really work as a general policy. On other issues he adopted more or less the conservative approach despite the abysmal record that 30 years of Reaganism and Bushism has left in its wake. Reagan and Bush policies have created a nation which for all intents and purposes has joined the Third World. Before Reagan took over, the US was a manufacturing nation that was a net creditor. Now all the manufacturing jobs have left for Asia and the US is a debtor nation like no other still trading on the fact that the dollar is the world's reserve currency. Some day we'll realize that that was more of a curse than a blessing because it only allows us to go deeper and deeper into debt.

Obama's big mistake though was failing to properly analyze the causes of the Great Recession. He and the Democrats thought the country would bounce back if only the banking system was not allowed to disintegrate. The result was that they bailed out Wall Street but failed to give much help to Main Street. Of course, Republicans were basically happy with this result but they wouldn't go so far as to give Obama any credit. Much to the current administration's dismay, the economy did not bounce back. Unemployment remains at ridiculous levels with the unemployed losing their houses in record numbers. Foreclosures continue apace. The combination of lack of jobs and people getting kicked out of their homes represents the bankruptcy of the Obama administration's approach to getting the economy back on track. But if the American public thinks the Republicans, having been voted into office and the Democrats thrown out, will do any better, they have another think coming. The Republican approach will be to accelerate joblessness and homelessness. Under the Republicans, the safety net will be shredded totally. The growing transfer of wealth from the poor and middle class to the rich will increase.

So what is the public thinkling? If they think that voting the Republicans in will save their jobs or their houses, they are absolutely nuts. The Republicans will revert to the policies of Reagan and Bush which have been tantamount to the destruction of the US economy. Jobs will continue to be outsourced. The unemployed will have their benefits reduced. The long term unemployed will be cut off completely. Any public program that benefits the poor will be eliminated. The hollowing out of the middle class will continue on steroids. While Obama and the Democrats have been reluctant to analyze the structural changes that Bush and Reagan policies have brought about and to propose anything too radical in terms of correcting them, Republicans having regained power will do all they can to run the economy into the ditch again. They will transfer wealth from poor to rich with a vengeance. They will ramp up the War Department and spend more trillions in futile battlefield endeavors and foreign adventurism. They will do all they can to put an end to social security and Medicare.

Is this what the public really wants? Don't they understand that Republican policies of the last 30 years are the problem, not the solution. Do they really want a return to those policies? If so, they will have to bear the responsibility for hastening the destruction of the US as a democratic, largely middle class nation and turning it into a corporatist state where the former middle class will have to get used to the role of being peons and peasants. They will have been responsible for hastening their own demise.

After Valarie Stovall fell behind on the mortgage on her home near Hagerstown, her lender agreed in April to slash her monthly payment by $300, and she immediately started paying the reduced amount.

That's why, Stovall said, she thought nothing of the yellow flier she ripped off her screen door as she returned from the grocery store one afternoon last July.

"Then I read it and went 'Oh my God,'" she said. "It was a notice of eviction."

Across the country, struggling homeowners are increasingly tripped up by mortgage lenders that press ahead with foreclosures regardless of any effort they make to provide borrowers with relief on unaffordable mortgages.

Amid the worst housing crisis since the Great Depression, mortgage companies have established a dual-track approach toward troubled homeowners, negotiating with them over loan modifications while trying to seize their homes.

Top government officials have been urging lenders to redouble their efforts at modifying burdensome loans and have barred lenders from foreclosing on homeowners who are seeking to rework their mortgages under a federal program. Mortgage companies, however, have continued to pursue this two-track strategy, with a widening toll especially on those homeowners who have been trying to resolve their mortgage difficulties before they snowball, according to federal and state officials and consumer advocates.

During the last month, several major lenders have temporarily halted thousands of foreclosure cases amid reports that fraudulent court documents and improper procedures have been used to evict people from their homes. But disarray within the mortgage industry goes much further. And the foreclosure pause has done little to address the common industry practice of taking homes from people who'd been led to believe they could save them.

"It's still happening everywhere," said Arizona Attorney General Terry Goddard, who has tried to bar the dual-track process in his state, one of the hardest hit by the foreclosure crisis. "It's one of the largest complaints I get. . . . The lenders need to make a choice. What do they want: a foreclosure or a loan modification?"

In Centreville, Woodrow Roberts III said he enrolled last October in a loan modification program with Bank of America. At the time, he was still current on his $3,000-a-month payments but wanted some relief until he could find a second job. The bank agreed to trim the monthly payment by $600 for a three-month trial period and consider Roberts for a permanent modification, he recalled.

After three months, he said, he heard nothing from the bank. "I called in every week to see the status of my loan," Roberts said. "After a year of phone calls and no real information, I received a letter in the mail." It said he had been rejected for a modification and that he owed more than $8,800 - the total he'd thought his payments had been reduced over the course of the year plus fees. If he didn't pay, the letter warned, his home would be sold at a foreclosure auction Nov. 12.

"If I knew this type of program could risk everything, I would have never entered into this program," Roberts said. He explained he can't afford to pay the sum demanded all at once and hasn't been allowed to spread it out over time.

In response to a reporter's question about the case, Bank of America spokeswoman Jumana Bauwens said Roberts was turned down for a permanent loan modification under the federal program because his income was too high to qualify. But she said the bank is now reviewing whether he is eligible for alternative relief.

Kevin Matthews, a Gulf War veteran, was initially rejected when he applied to his lender, USAA, for a modification of the mortgage on his Baltimore rowhouse. But when a housing counselor contacted USAA on his behalf, the lender invited him to reapply, Matthews said. The counselor filled out a 70-page application for Matthews in early May.

The lender did not respond to this new request until after his home was taken away in a foreclosure sale two weeks later, he alleged. He was evicted in June while he was away on school-related travel.

Roger Wildermuth, a USAA spokesman, said his firm was no longer responsible for Matthews's loan because it had been sold to GMAC, though GMAC employees in his case would have identified themselves as USAA workers "to create a seamless customer experience." James Olecki, a GMAC spokesman, said his firm "put forth every effort to pursue all alternatives in this case."

Matthews is now suing the foreclosure attorneys. If he loses, the tab for his defaulted loan would fall on taxpayers because his mortgage is guaranteed by the Department of Veterans Affairs.

"It's like the right hand doesn't know what the left is doing," said Michael J. Gugerty, a real estate attorney in the District. "I think what happens is you can talk to the loan modification people but that doesn't take you out of the assembly line they've set up for foreclosure."

The Mortgage Bankers Association said lenders often file initial foreclosure paperwork as they work to modify a loan. John Mechem, an MBA spokesman, said they want to make sure that if the modification effort fails, they can promptly move forward with the foreclosure, which can take up to three years to complete depending on the state. Fannie Mae, Freddie Mac and the Federal Housing Administration impose deadlines for filings on loans these agencies guarantee or own, he said.

But Phillip Robinson, a lawyer at the nonprofit law firm Civil Justice Inc. in Baltimore said, "Attorneys and housing counselors here and all over the country complain every day about this kind of thing."

In June, the Obama administration tightened the rules for the government-sponsored program, which pays lenders if they rework a borrower's loan, to ban mortgage companies from conducting a foreclosure sale unless the modification has already been denied. The administration also ordered lenders to notify the lawyers handling foreclosures on their behalf that a borrower does not qualify for a modification before a sale can proceed.

Valarie Stovall has taken the matter into her own hands. After the eviction notice was taped to the door of her house in Williamsport, Md., near Hagerstown, she sold every piece of jewelry her mother left her - including a platinum and diamond ring passed down in her family for generations - to hire lawyers, she recounted.

They told her "'do not leave the house unoccupied for any reason. If somebody comes to the house and tells you that you have to leave, call the police,' " Stovall said. "I was afraid to go to the grocery store, afraid to go anywhere for fear of what would happen."

Stovall first bought her two-level colonial in 2004. Five years later, when a back injury forced her to leave her job arranging dental board exams, she retired and applied to her lender, SunTrust Bank, for a loan modification because she feared she would fall behind, she said.

In April, eight months after she applied for relief, the bank approved Stovall for a three-month trial modification that reduced her monthly payment to $543 from about $830.

Stovall said she made each payment on time, in May and June. But shortly after making the June payment, she received a foreclosure notice.

"I called SunTrust and they said: 'Don't worry about it. The loan modification and foreclosure programs run parallel with each other and as long as you're in the loan modification process, nothing will happen,' " she said.

Still uneasy, Stovall called the bank's foreclosure lawyer, who reassured her that the lender was correct. She sent in her July payment. The foreclosure notices kept coming and Stovall kept calling. SunTrust told her that the foreclosure sale couldn't be put on hold until a date for the sale had been scheduled. The bank told her to call back 10 days before her home was to be auctioned off.

"That made me really nervous, but their attorney said the same thing," she said.

In June, with the sale date set for July 9. Stovall reached a SunTrust representative who told her she would go ahead and put a stop notice on the foreclosure sale. But when Stovall called back a few days before the scheduled sale, there was no such notice entered on her record. A SunTrust supervisor asked Stovall to resubmit her bank statements and other paperwork, and Stovall did.

Five days after the sale date, the eviction notice arrived. It looked like so many other fliers that regularly appear on her door step from lawn care services and house cleaners trying to solicit business. She glanced at it only after putting down her grocery bags. "That's when I lost it," Stovall said.

Stovall managed to reach the supervisor she'd spoken to only days earlier. "First she said she never received the paperwork," Stovall said. "Then she said: 'Oh, here it is. I found it. You don't qualify.' "

There was no further explanation. Stovall was told the supervisor's supervisor was not available. By then, her property had already been taken back by the bank.

SunTrust would not comment about the case for this article.

Stovall's lawyer asked a local court to dismiss the foreclosure case. SunTrust sent her lawyer an e-mail, saying it would negate the sale.

But the case itself was not dismissed, leaving open the prospect of another foreclosure sale.

So Stovall sued SunTrust. The case is pending in federal court in Maryland.

"I am just sitting here biting my fingernails," she said. "I have good days, when I think it's going to work out and then sometimes I have panic attacks and I cry in jags. Even though I know in my heart that I'm right, I don't know what the courts are going to do."

October 29, 2010

Sonya Robison is facing a foreclosure suit in Colorado after the company handling her mortgage encouraged her to skip a payment, she says, to square up for mistakenly changing the locks on her home, too.

Thomas and Charlotte Sexton, of Kentucky, were successfully foreclosed upon by a mortgage trust that, according to court records, does not exist.

As lenders have reviewed tens of thousands of mortgages for errors in recent weeks, more and more homeowners are stepping forward to say that they were victims of bank mistakes — and in many cases, demanding legal recourse.

Some homeowners say the banks tried to foreclose on a house that did not even have a mortgage. Others say they believed they were negotiating with the bank in good faith. Still others say that even though they are delinquent on their mortgage payments, they deserve the right to due process before being evicted.

Some consumer lawyers say they are now swamped with homeowners saying they have been wronged by slipshod bank practices and want to fight to keep their homes. Joseph deMello, a Massachusetts lawyer who represents Mr. Rought, said the common denominator in many of the cases was an overwhelmed system of foreclosures in which banks relied on subcontractors to do much of the work.

“No one double-checks anything,” he said. “It’s completely high volume and that’s unfortunately what leads to this.”

It may never be known how many homeowners have legitimate claims against the banks, real estate and banking experts say, because lenders do not release such data and because the vast majority of cases never make it to court.

For the last month or so, some of the nation’s largest banks have temporarily halted foreclosures in some states amid accusations that the paperwork used as evidence to oust homeowners was incomplete or signed off by so-called robo-signers who did little to check its veracity.

Even if the paperwork was faulty, the fact remains that most homeowners in foreclosure have not paid their bills, often because they bought more house than they could afford or because they lost their jobs. As a result, they will most likely lose their homes eventually, once the banks clean up their paperwork and resolve any outstanding legal issues.

“We believe that the overwhelming majority of the cases will be that the loan was seriously delinquent and needed to go to foreclosure,” said Paul Leonard, vice president for government affairs of the housing policy council at the Financial Services Roundtable, an advocacy group for the nation’s largest financial institutions.

Consumer lawyers and housing experts acknowledge that it is relatively rare that a bank initiates foreclosure on a homeowner who is current on the mortgage or has no mortgage at all. More common, they say, are instances where homeowners have applied for mortgage modifications but get foreclosed upon anyway.

In a report to Congress released this week, a federal inspector general described the government-sponsored modification program, known as the Home Affordability Modification Program, as deeply flawed.

While about 467,000 mortgages had received permanent modifications under the program, an estimated 3.5 million homes will receive foreclosure notices this year, an increase of 26 percent over 2009, the report says.

“You have this promise of relief for borrowers but actually getting that relief is like a zigzag line from point A to point B,” said Jose Vasquez, a lawyer for Colorado Legal Services.

Ms. Robison’s case is a variation on the theme. When she returned home to Yoder, Colo., outside Colorado Springs, from a holiday trip in December 2008, she found the locks changed and her electricity, gas and water heater shut off. A sign on the door advised her to contact Safeguard Properties, a company hired by the mortgage servicer, Litton Loan Servicing.

The notice came as a shock to Ms. Robison, a single mother of three who is now 36. She had renegotiated her mortgage just months before and was current on her payments. When she finally got back into her house, the food in the refrigerator was rotten and her lawn mower and air compressor had been taken.

When she called Litton, an employee admitted that the company had made a mistake in changing the locks, according to court documents. In order to reimburse her for her losses, Ms. Robison said, the employee told her he would “work something out” regarding her January mortgage payment, so she did not make it, court records show.

But when Ms. Robison paid her February and March mortgage payments, they were returned. And in March, Deutsche Bank initiated foreclosure proceedings. “I’ve been wanting to pay them the whole time, but they basically stopped taking my payments,” she said.

Deutsche has asserted its right to Ms. Robison’s house under a document that is meant to assign ownership of a mortgage note, known as an allonge. But Ms. Robison’s lawyer, Stephen Brunette, says Deutsche Bank is not named in the allonge that the bank submitted during court proceedings and does not appear on any other documents relating to her home.

Both Deutsche Bank and Litton Loan Servicing declined to comment about the case. A Deutsche Bank spokesman noted that the mortgage servicer, not the trustee, is usually responsible for handling foreclosures.

In Michigan, Mr. Rought says that the bank went after the wrong person.

Mr. Rought bought the cabin from Deutsche Bank on Jan. 27, 2009, paying in cash. He spent the next seven months fixing it up in anticipation that his daughter, Hannah, “would live in the house and be away from her parents for the first time in her young life,” court records show.

But in August of that year, when the Roughts pulled into the driveway, they noticed that something was wrong. The American flag was missing, the house had been broken into and the locks had been changed.

The Roughts’ belongings were gone too, including an heirloom dining room table, pots and pans, a pile of firewood — even the bracket used to hang the American flag. A contractor for Deutsche Bank, Field Asset Services, left a sign tacked to the front door, so the Roughts contacted them and said a mistake had been made.

A month later, however, Deutsche Bank’s representatives came to winterize the house, pouring antifreeze in the sinks and toilets and disconnecting the water pump. “We had expected an answer by now and quite frankly am appalled by the total lack of respect and professionalism of your company,” Mr. Rought wrote in a Dec. 1, 2009, letter to Field Asset Services. “We are trying to be patient and settle this peaceably. What would you do?”

Charlotte and Thomas Sexton, of Carlisle, Ky., fell behind on their mortgage payments because the payments on their adjustable-rate mortgage spiked upwards and Ms. Sexton lost her job.

They tried unsuccessfully to sell the home, to refinance it and to modify their mortgage payment. When the Bank of New York Mellon filed a foreclosure notice last summer, they went to a local lawyer, Brian Canupp, who, with the help of a forensic accountant, found a problem in the foreclosure filing.

Last month, a judge tossed out a foreclosure judgment after Mr. Canupp argued that the mortgage trust that claimed to own the Sextons’ promissory note —Mortgage Pass-Through Certificates Series 2002-HE2 — did not exist.

Instead, another trust, called IXIS Real Estate Capital Trust, Series 2005-HE2, claimed to own the Sextons’ note, court records show.

Ms. Sexton said that regardless of who owns her promissory note, she just wants to stay in her home and hopes that the bank will eventually agree to a loan modification.

“We found a mistake,” she said, “that gave us a light at the end of the tunnel.”

The current debate over foreclosure fraud has been a revelation, even for those of us who have become familiar with the power of moneyed interests to influence the national dialog. Despite overwhelming evidence of widespread lawbreaking and deception, there's still a popular point of view that says that fraudulent foreclosures are "just a technicality" and that what we're seeing is neither a systemic problem nor a crime wave of epidemic proportions.

Actually, it's both. Here are four reasons why the foreclosure fraud scandal is very important. They're counterarguments to the conventional "paperwork" wisdom, a point of view whose numbing effects threaten to anesthetize us to the profound significance of this scandal.

1. Dragnet

A recent New York Times article is just one of many that put names and faces to the foreclosure scandal: A man who paid cash for a vacation cabin found that foreclosure papers had been filed and his locks had been changed, despite the fact that there was no mortgage on the property. A couple was foreclosed upon -- successfully -- by a mortgage trust that court papers say doesn't exist. A woman in Colorado also had her locks changed by mistake, so the bank offered to let her skip a mortgage payment as an apology. When she did, foreclosure papers were filed on her.

The writers of the Times article also frame the counterargument: "Even if the paperwork was faulty, the fact remains that most homeowners in foreclosure have not paid their bills ... " That's Argument #1 in favor of downplaying the foreclosure fraud controversy: Sure, there have been some outrageous cases like the ones listed above. But the vast majority of people facing foreclosure really have mortgages, and they're really delinquent on them. So, the argument goes, what's the big deal? Fix the paperwork, weed out the errors, and let's all get on with our lives.

Here's the real problem: Any massive invasion of personal rights and liberties will catch some people who deserve to be caught. If we placed the entire country under martial law, initiated a state of siege, and rounded up every suspicious-looking person in America with a nationwide dragnet, many -- perhaps most -- of the people dragged off to jails would be guilty of something. But that's not how free societies operate. People have rights, even if they owe money.

The legal process around foreclosures has become a massive dragnet, run and managed by the financial services industry with the compliance of too many state and national legal institutions. The most egregious stories -- i.e., people who paid cash for houses and had them seized anyway -- are almost certainly a small minority of the foreclosure cases out there. But they show us how badly corrupt the entire process has become, and how far we've drifted away from fundamental principles of due process.

2. The Dukes of Moral Hazard

Here's the complete sentence from the Times article: "Even if the paperwork was faulty, the fact remains that most homeowners in foreclosure have not paid their bills, often because they bought more house than they could afford or because they lost their jobs. As a result, they will most likely lose their homes eventually, once the banks clean up their paperwork ..." That's a point the financial services industry is only too happy to underscore: "We believe that the overwhelming majority of the cases will be that the loan was seriously delinquent and needed to go to foreclosure," the article quotes an industry spokesperson as saying.

While the Times journalists did some excellent reporting for this piece, their sentence (above) framed the situation so well - from the financial industry's point of view, that is - that a quote from the industry itself was almost redundant. Sure, a lot of people "bought more house than they could afford," and some of them did so irresponsibly. But the financial industry's all too happy to leave it at that, characterizing all these foreclosures as problems of individual character rather what they really are: a breakdown of process, law, and ethics on a systemic level.

According to the most recent report from Lender Processing Services, Inc., 9.22% of all mortgages in the US are delinquent - and that's not counting those that are in foreclosure. 8.22% are either in foreclosure or more than 90 days overdue. All told, roughly 11% of all mortgages are either delinquent or in the foreclosure process. That's a problem with the system, not the product of millions of flawed individual characters.

Here's the bottom line: More than one in ten mortgages is in bad trouble. What's more, one in four mortgages is underwater, which means there's not enough collateral to cover billions of dollars in loans. The generous explanation for the banking industry is that they're completely incompetent at what they do. A huge chunk of the loans they've written are bad. Forgive the language here, but the bank-friendliest explanation for this systemwide breakdown is that bankers suck at what they do.

But the real explanation is that they knew these loans were bad -- and wrote them anyway.

Why? Because they intended to make quick and easy money by pumping up housing values, churning loans to customers who they knew couldn't pay. (The customers didn't know that, but the banks did.) They thought they could float this crap game forever, riding an ever-growing bubble and tossing the defaulting homeowners away when they couldn't pay the nut. But the bubble burst and the crap game got shut down.

They were able to walk away from this massive nationwide scam by convincing the country that the only irresponsible parties were people who "bought more house than they could afford." It worked, too. But now they've been caught in widespread fraud -- and they want to walk away from that, too. Nobody's suggesting there weren't irresponsible buyers out there, too. But so far, the bankers have been able to convince the country that the "moral hazard" was everybody's but theirs -- even though they were running the entire system, and it's the entire system that's broken down.

This time, the guilty parties should be made to pay for criminal behavior. And they should be forced to accept some of the financial consequences of their bad behavior by writing down some of the principal on the bad loans they've issued and sold.

3. Contract Killers

A loan is a contract, an agreement between two parties. The lender agrees to provide a certain sum of money, which the borrower agrees to repay according to agreed-upon terms and conditions. One of the biggest problems with the foreclosure fraud scandal - and the systems, tricks, and traps that created it - is that it obscures the contractual record between the parties, leaving all the information (and all the power) on one side of the transaction.

Consider the woman whose bank offered to let her skip a monthly payment in return for accidentally changing her locks, and then proceeded to foreclose on her. With shell games like the mortgage industry's MERS, which obscures the actual trail of ownership and insulates the lender from court proceedings, the bank in question doesn't even have to show up during the foreclosure process. That means that she's denied the right to face her trading partner in court. Due process is trampled upon, and so is the right to legally enforce a contract.

People facing foreclosure aren't just people who lost their jobs or "bought too much house." They're people who had a deal with their bank. Then they were hit with late fees, or unilateral changes to their loan terms, or other surprises that caused them to fall into a spiral of debt. Of those who have missed payments, many of them have a legitimate case to make: that the other party broke the contract and that's why they've missed payments. The foreclosure fraud scandal has taken away their right to defend themselves in court.

4. Getting Medieval On Your Assets

The last counterargument is literally an ancient one. It's based on the long-established right of any citizen to be inviolable in their home and possessions. This goes back to the Magna Carta, which established that the will of the monarch wasn't arbitrary and that the property of "freemen" could not be seized without proper legal recourse. This principle was enshrined in the Fifth Amendment of the Constitution, which says "No person shall be deprived of life, liberty or property without due process of law." (emphasis mine)

It's bad enough that we've seen massive violations of the Constitution and people are saying it's no big deal. But we're also seeing massive violations of a legal principle that was established as an inalienable human right ... in 1215 AD! And people are still saying it's no big deal. This isn't a "technical" problem or a "paperwork" issue. It reflects on our national character, and our will to preserve the rights and liberties that have existed for eight centuries.

The problem isn't that some people bought "more house than they can afford." The problem is that we have more rights as free citizens than the banking industry can afford. So, naturally, they want us to pretend those rights don't exist. If we do, we'll lose them. And that will be a really big deal.

_______________________________________________________________

Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light.

October 19, 2010

The White House said Tuesday that the government is committed to holding banks accountable for any laws that are broken during an ongoing foreclosure fraud scandal that led the nation's largest banks to briefly halt foreclosures across the country.

"As institutions are determining their next steps in addressing these issues, we remain committed to holding accountable any bank that has violated the law," said White House spokesman Robert Gibbs in a statement.

Gibbs also said that the Federal Housing Administration and the Financial Fraud Enforcement Task Force are investigating the foreclosure process. The Justice Department is investigating as well, and the administration has also said it supports the investigations of attorneys general in all 50 states.

"It's good that they're doing that, for sure, but most of the investigations should have happened three or four years ago," said John Taylor, president of the National Community Reinvestment Coalition. Taylor and other consumer advocates have said the problem spans from the loan origination that inflated the housing bubble to the failure to modify mortgages after it burst, not simply when a foreclosure is already inevitable. "What they're responding to is all this 'robosigning' and improper processes for ensuring proper documents are included. That's kind of the tail end of the process."

Members of Congress have demanded a national foreclosure moratorium after mortgage servicers' employees admitted they didn't review information in thousands upon thousands of foreclosure documents. The admissions have led consumer advocates to question the propriety of foreclosures everywhere, but mortgage servicers say they have found no evidence that anybody was wrongly foreclosed.

Bank of America announced on Monday that it would resume foreclosures in 23 states where a court's approval is needed to foreclose.

The Obama administration has resisted a national moratorium, saying it would be more harmful for homeowners than allowing foreclosures to continue.

Story continues below

One top bank regulator told HuffPost that the fraud is limited to paperwork errors affecting only seriously delinquent borrowers who are doomed to foreclosure. Consumer advocates say there is ample evidence of sloppy servicing leading to improper foreclosure proceedings.

"The problem is we have such a backlog around this country of homeowners who need a modification or a refinance and are not getting it. Most of these people simply need more collaboration on the part of servicers and lenders in order to get those loans modified or refinanced," said Taylor. "That's what a moratorium would address. It would give the counselors, the legal services people the time to do a workout that would make sense."

Regarding the possibility of foreclosure lawsuits against the banks by individual homeowners, an obvious way people can afford to do this is by bringing a class action lawsuit or, perhaps better still, the same is first done by a 50 state attorney generals' class action suit on behalf of all citizen plaintiffs.This is exactly what occurred in the 1998 46 state successful class action suit precedent against the major tobacco industry firms on behalf of those who get sick from tobacco smoke. This case ended in a court damage ruling for a +$200 billion award to the 46 states (paid over 25 years).

During the prior period 1954-1992, individual and small class action tobacco case suits based on negligence, deceit, failure to warn, breach of express warranties, strict liability were lost. Plaintiffs went broke legally fighting the rich tobacco firms that took thousands of dispositions, filed every conceivable motion and legal delay tactic, eventually bleeding dry plaintiffs' financial and emotional resources.

Then came a stronger class action suit filed by flight attendants in Florida claiming personal medical injury and costs related thereto from second-hand smoke in planes. This resulted in over 3000 individual lawsuits and a major settlement in 1997. This was part of a wave of smaller class action lawsuits in the 90s brought by those injured by tobacco products as well as medical reimbursement suits brought by states'attorney generals and insurance firms of a few states (which led to 46 state class action suit).

Medical, legal and criminal theories were used successfully in the flight attendants' case -- most of which would have a direct application in a possible class action suit against the illegal mortgage documentation acts of major U.S. banks. Legal theories used included fraud, intentional and negligent misrepresentation (sound familiar to banks' prior knowledge of illegal non-transfer of proper mortgage documentation/property title to suck in investors for pooled mortgages faster -- driven by banks' fee greed), unjust enrichment or indemnity (sound familiar to banks' quick buck actions), and criminal theories under the RICO Act ... criminal law that also has direct application possibilities against banks' massive illegal mortgage documentation, false documentation, and subsequent possible criminal homeowner foreclosure acts.

Thus, as the tobacco firms were forced to seek a national settlement in late 90s under the 1998 medicare-related class action U.S. Master Agreement involving 46 states, so should the banking industry be forced to negotiate a class action settlement for their gross misdemeanors and deceit around the mortgage closure and foreclosure casino stings perpetuated on millions of homeowners. If this also means ultimately applying existing legislation to break up the big banks on the basis their behavior has posed and is posing a threat to U.S. financial or economic security, then so be it.

As we all know there is a major philosophical divide in U.S. politics. One the one hand there are those who think it is the role of government to help ensure that the vast majority of the population can enjoy a decent standard of living. On the other side are those who believe the role of government is to transfer as much money as possible to the rich and powerful. The latter group seems to be calling the shots these days.

This is seen clearly in the " liar lien" scandal: the flood of short order foreclosures that ignore standard legal procedures. The banks have been overwhelmed by the unprecedented volume of defaulting mortgages in the wake of the housing crash. Even under normal circumstances foreclosure rates that in some areas exceed ten times normal levels would create an administrative nightmare.

But these were not ordinary loans. The highest rates of foreclosure are on the quick and dirty loans made at the peak of the bubble. These loans were issued to be sold. Almost immediately after the ink was dry, the issuers would sell these loans off to Citigroup, Goldman Sachs, or other investment banks to turn them into mortgage backed securities. The investment banks themselves were running short order operations. More rapid securitization meant more profits.

In this process, the paper work often came as an afterthought. As a result, necessary documents weren' t signed, title transfers weren' t properly registered, the notes tying loans to specific properties may not have been properly filed and other paper work errors went uncorrected.

If the law were being followed, these issues would create serious problems for servicers trying to foreclose on homes where the owner has defaulted. Banks would have to spend the necessary time, paying high cost lawyers for their work, to reconstruct the paper trail needed to establish clear title to the house and the documentation that would allow them to foreclose on a delinquent borrower.

In some cases this may not even be possible. Many of the issuers that dominated the non-prime mortgage market at the peak of the bubble are no longer in business. They probably did not make sure that all the documentation went to the right place before they closed their doors.

If the Wall Street banks were like the rest of us, the policy response would be simple: follow the frigging law. If banks want to foreclose then they should have to present the court with the proper documents, end of story. Anyone who has ever bought a house or refinanced a mortgage knows the headaches involved. Everything must be in order, a process that can cost thousands of dollars in fees, as a long sheaf of documents is signed in the presence of a lawyer. This process can easily take two hours.

The banks don' t think that they should have to endure the same expensive tedium as the rest of us. For them, these processes are simply formalities that can be circumvented. Hence, the " robo-signers" who are paid to put their names to documents that they know nothing about.

Some people have been wrongly foreclosed in this process, precisely the sort of mistake that the bureaucratic formalities are intended to prevent. More frequently, homeowners have probably been assessed fees and penalties that they do not actually owe. To the banks this is just another unfortunate error in the high-speed foreclosure process.

In this context the demand for a foreclosure moratorium makes perfect sense to those who think that it is responsibility of government to protect the majority of the population. After all, if someone has fallen behind in paying their bills, they still have a right to expect that the law get followed.

A foreclosure moratorium would allow regulators to ensure that the servicers have systems in place that guarantee that the right procedures are followed. A moratorium on foreclosures would serve the same purpose as the moratorium on deep sea drilling following the BP disaster. The alternative - that we should trust the banks - doesn' t pass the laugh test.

By contrast, those who believe that government exists to serve the rich and powerful point out that these procedures will raise costs for banks. In some cases, they may not even be able to carry through a foreclosure, since the proper documentation does not exist.

The result could be billions of dollars in losses for the Wall Street banks. That may not put them out of business, but it certainly could knock a few million dollars off the bonuses of some the top executives.

So there you have it: the question of whether the Wall Street banks should have to follow the same rules as the rest of us. It is one of the most central philosophical questions underlying politics today.

This column is cross-posted at Truthout. Dean Baker is co-director of the Center for Economic and Policy Research and author of the new book, False Profits: Recovering from the Bubble Economy (PoliPointPress, 2010).

October 18, 2010

It now turns out that many Americans may have had their homes foreclosed on and been evicted illegally based on faulty documentation by the banks. If so these Americans have had their property rights violated and in many cases been reduced to penury and homelessness by powerful institutions which have done so fraudulently. Now many potential foreclosees are challenging the banks in court. But what of the poor souls who have already lost their homes? What agency or entity is going to stand up for them to redress their grievances and get their homes back for them. Will the Obama administration do that? Probably not. The Obama administration has stood with the banks ever since the financial crisis began. This is Phase II of the financial crisis. Will average middle class Americans obtain justice this time around?

Now the light dawns, the light bulb comes on as to why the banks were ignoring the congressional statute that asked them voluntarily to modify mortgages. They were in a huge hurry to foreclose and evict before it came to the light of day that they were doing all this illegally. In the first place the banks did not have the proper paperwork so they were hiring fast food workers, hail stylists and Wal-Mart employees to be robo signers, i.e. to hurriedly and hastily sign documents that purported to replace the official documents of ownership that the banks did not have in their possession. If the banks could hurry this whole procedure and not be challenged by the homeowner in court, they could obtain possession of the property and evict the homeowners before they knew that they had been screwed. The courts are set up in such a way in many states that they will believe the banks unless they are challenged in court and many homeowners didn't know what was going on much less than they had the right to challenge their foreclosures and evictions in court. But now the tables have turned, and everyone and his brother knows that the banks have been screwing them. That's why all 50 states have declared a moratorium on foreclosures. Duhhh!

Arianna Huffington, in her naivete before the crisis hit, says in her recent book, "Third World America": "The single most valuable thing the government could do to help people facing foreclosure is to pass a cramdown bill allowing homeowners in bankruptcy to renegotiate their mortgages under the guidance of a bankruptcy judge.

...

"We should make it mandatory that homeowners and lenders engage in mediation prior to any final foreclosure. ... Currently, many homeowners don't even talk to their lenders until they have been foreclosed on - partly because the lenders often make it next to impossible to reach them. Or, if your mortgage has been sliced up and sold to speculators, to even find them."

Jeez, I wonder why??!! You don't think that the bank, knowing that they were operating illegally, were hesitant to engage in open discussions with homeowners on whom they were about to foreclose, do you? You don't think that the banks' modus operandi was to hurry up and "get 'er done" before the homeowners realized they were being screwed? Ms. Huffington's wishful thinking never actually got anywhere in Congress after Congress gave lip service to it in the Emergency Mortgage Loan Modification Act of 2008: H.R. 5579 which never actually made it into law.

The H.R. 5579 summary is summarized as follows:

Establishes a standard for loan modifications or workout plans for pools of certain residential mortgage loans.

States that the servicer of such pooled loans owes a duty to the securitization vehicle to maximize recovery of proceeds for the benefit of all investors and holders of beneficial interests in the pooled loans, in the aggregate, and not to any individual party or group of parties. Deems the loan servicer to be acting on behalf of the securitization vehicle in the best interest of all such investors and holders if the servicer makes certain loss mitigation efforts for a loan in or facing payment default in the reasonable belief that the particular modification, workout plan, or other mitigation actions will maximize the net present value to be realized over that which would be realized through foreclosure. Declares that, absent contractual provisions to the contrary, a servicer acting in a manner consistent with such duty shall not be liable to specified persons (including any person obligated pursuant to a derivatives instrument to make specified payments) for entering into a qualified loan modification or workout plan for loss mitigation purposes. Defines "qualified loan modification or workout plan" as one that: (1) is scheduled to remain in place until the borrower sells or refinances the property, or for at least five years from the date of adoption of the plan, whichever is sooner; (2) does not provide for a repayment schedule that results in negative amortization at any time; and (3) does not require the borrower to pay additional points and fees. States that, for purposes of a qualified loan modification or workout plan, negative amortization does not include capitalization of delinquent interest and arrearages. Defines "securitization vehicle" as a trust, corporation, partnership, limited liability entity, special purpose entity, or other structure that: (1) is the issuer, or is created by the issuer, of mortgage pass-through certificates, participation certificates, mortgage-backed securities, or other similar securities backed by a pool of assets that includes residential mortgage loans; and (2) holds such loans.

You know, even if this had made it into law, it does not really protect the homeowner. It protects the investor as one would expect from the heavily lobbied Congress. Statements like "the servicer of such pooled loans owes a duty to the securitization vehicle to maximize recovery of proceeds for the benefit of all investors and holders of beneficial interests in the pooled loans" make it clear that loan modification should take place not to protect the homeowners being foreclosed on, but only if it maximizes returns for the investor. How cold is that? And even this statute which might have afforded some mitigation for the homeowner didn't even make it into law! Instead of mortgage modification, the banks went full steam ahead to foreclose and evict. Congress and the whole Federal government should be ashamed of themselves for protecting the interests of banks and letting the average American be thrown out on the streets. Mortgage modification should have been mandatory, not just at the banks' discretion and not just in bankruptcy court as Ms. Huffington suggests, and then not even the most lenient, voluntary - on the part of the banks - mortgage modification made it into law!

Well, one might pause and ask why don't the banks actually have in their possession the proper legal documents that would give them legal ownership of the properties they are hastily foreclosing on (before anyone finds out). There are two reasons and they both have to do with saving the greedy banks money. 1) They didn't want to pay real estate taxes on the properties they were mortgaging and 2) They didn't want to pay recording fees to local county governments. So they invented REMICs, Real Estate Mortgage Investment Conduits. What they claimed was that they were just a "pass through" that they really didn't own the properties they were selling mortgages on, but they were just passing through ownership to investors or to some other entity. Well, if they don't actually own the property, they don't have a right to foreclose, do they? And if they are now claiming that they really did own the properties after all, well, a lot of past real estate taxes are due, aren't they? And they are doubly up a creek because at least in some states they are required by law to actually have the piece of paper in their possession that gives them title to the property which would have required them to go to the local county recorder's office and pay a recording fee. No legal title, no right to foreclose. No ownership because you were just a pass-through, no right to foreclose. If the glove fits, you must acquit! In short the banks don't have legal ownership of the properties even though now in hindsight they are trying to reconstruct a paper trail. Good luck in paying all those back taxes and maybe some fees to local county governments too! But wait a minute - you can't just justify taking a person's home away from them by reconstructing a paper trail in hindsight. In fact the case that can be made which is legally much stronger is that the loans in question should be written down to zero giving the homeowner legal title and possession of his or her house mortgage free!

So now we understand why banks weren't eager to engage in foreclosure prevention programs or loan modification programs which would have kept homeowners in their houses. They weren't interested in loan principle "cramdowns" in which the principle would be modified to make monthly payments doable for homeowners. Neither were they interested in modifing interest rates although interest rates in the nation have dropped several percentage points from many of the loans. No, they wanted to hurry up and foreclose and evict as many homeowners as possible before anyone found out that they were doing all this illegally. But will state, local or national governments now stand up and give justice to the aggrieved homewoners, finally? Don't bet on it. Up to now they have bent over backwards for the banks at the expense of average Americans. They have bailed out the banks at taxpayer expense while letting the banks screw average Americans. As Paul Krugman said in his recent op-ed, nobles used to take peasants' property at will because the peasants had no standing in the courts. Well the more things change, the more they stay the same. For an excellent primer on the foreclosure crisis, click here.

Last week, Bank of America announced that it was halting foreclosures in all fifty-states while it reviewed its foreclosure process for defects. Now several lawmakers on Capitol Hill are calling for other banks to initiate nationwide foreclosure freezes—a move which the Obama administration is currently opposing.

Photo: Jeff Turner

So what’s going on here? Why is the foreclosure machinery of our nation’s largest banks suddenly grinding to a halt? What does this mean for the financial sector and the economy?

Let’s start with the most basic questions first. Then I’ll explain some of the possible implications for homeowners, banks, and the economy.

How did this thing get started?

Ever since the housing bubble burst, there have been signs that there are serious problems with foreclosure practices. In some cases, the financial institution claiming it owns the mortgage has not been able to produce the underlying loan documents. In 2007, a federal judge held that Deutsche Bank lacked standing to foreclose in 14 casesbecause it could not produce the documents proving that it had been assigned the rights in the mortgages when they were securitized.

This decision was followed by similar rulings in other states stopping foreclosure proceedings. Typically the judges would find that the banks that were servicing mortgages pooled into bonds weren’t able to prove they owned the mortgages.

Why can’t they prove they own the mortgages?

Every time a mortgages changes hands, the new owners are supposed to receive an “assignment” of the mortgage notes from the buyers. The assignment is typically a short little document signed by both the seller and buyer of the mortgage acknowledging the sale, which is then attached to the mortgage documents themselves and delivered to the new owner.

When a mortgage is securitized it is typically sold to a Wall Street firm, which pools the mortgage with thousands of others. Investors buy slices of the pool, entitling them to cash-flows from the mortgage payments. The actual mortgages are assigned to a newly created investment vehicle. A servicer is tasked with ensuring the payments to borrowers get divided up properly and that delinquent borrowers get foreclosed upon.

Here’s where things get tricky. When a mortgage is securitized, the investors in the mortgage bonds don’t get assignments or notes. The investment vehicle doesn’t get the assignments or notes either. Instead, the physical notes are typically sent to a document repository company. The transfer of interests is noted in an electronic database.

But during the height of the housing bubble, investment banks were churning out mortgage bonds in such a frenzy, sometimes the assignments never got executed and mortgage notes never got delivered. Keep in mind that this was during the years when lenders were giving out low-doc and no-doc mortgages. It was inevitable that the fast and loose and slightly documented culture would not stop at the mortgage originator but stretch all the way through the process. (For more on this, see RortyBomb’s excellent discussion of the securitization process, complete with nifty and highly informative charts.)

For most mortgages, the note probably still exists somewhere. One problem that has arisen, however, is that some of the original mortgage lenders have gone under or been acquired by a larger bank. This can make tracking down the notes difficult, if not impossible.

Stephan admitted in a sworn deposition in Pennsylvania that he signed off on up to 10,000 foreclosure documents a month for five years. He said that he hadn’t reviewed the mortgage or foreclosure documents thoroughly. He quickly became known by the pejorative “robo-signer” for this way of getting mortgages through. This prompted Ally, which owns the GMAC mortgage company, to halt foreclosures in 23 so-called “judicial states.”

Because Stephan also signed foreclosures for hundreds of other mortgage companies, including J.P. Morgan Chase
[JPM 37.75 0.60 (+1.62%) ], the problem is not limited to GMAC. In fact, JP Morgan Chase also halted foreclosures in the judicial states.

Wait, what’s this about judicial states?

The majority of states in the country allow banks to foreclose on defaulted mortgages without going to court. They simply deliver the borrower a notice of the foreclosure sale. This is the method of foreclosure preferred by banks, since it is much faster and easier to execute the foreclosure sale, and much more difficult for borrowers to contest.

Twenty-three states, however, require banks to go to court to get a foreclosure order. These are the “judicial states.” In these states, banks are typically required to produce a sworn and notarized affidavit of a loan officer and submit the mortgage documents. Often, however, judges will issue foreclosure orders without the mortgage documents so long as the borrower doesn’t contest this point.

Keep in mind that in both judicial and non-judicial states, there are strong legal presumptions that favor the banks. So long as they have the mortgage note and the loan is delinquent—or so long as no one argues that they aren’t the owners of the mortgage or that borrower is not in default—the bank will almost always get the foreclosure.

But as the “show me the note” movement took off, more and more homeowners began to contest foreclosures by demanding to see the notes and, if the loan had been transferred or securitized, the assignment agreements. This typically was not fatal to banks seeking foreclosures. They could make up for the lost notes with lost note affidavits and retro-actively build an assignment chain. The worst that would happen, from the bank’s perspective, was that the foreclosure would be delayed.

In some cases, however, banks seem to have not even been able to manage even this kind of corrective action. Evidence has been produced to show that notarizations have been faked, documents forged, and folks like Stephan have simply been operating as foreclosure bots.

So is this just a concern for “judicial states?”

Although banks first shut down foreclosures in judicial states, the lack of documentation is a problem in any jurisdiction. Homeowners contesting foreclosures in both non-judicial and judicial states can win if the bank cannot provide documents proving it owns the mortgage.

In judicial states, however, the banks are especially exposed because they must initiate a lawsuit to get a foreclosure. If they have been submitting false documents to the court, they could be sanctioned and fined. Realizing that they had few internal controls over their own foreclosure practices, banks wisely shut down foreclosures in the states where they had the most exposure.

In non-judicial states, banks aren’t required to submit anything to the court until they are sued by a homeowner seeking to stop a foreclosure. That means that they are far less likely to submit fraudulent documents, since the process has already been slowed. Nonetheless, banks may still find themselves swamped by challenges. No one really knows how badly the missing documentation problem is at the banks.

The Wall Street Journal told me this is just about “paperwork” and politics. Are we making a mountain out of a molehill?

Our friends at the Journal are seriously misguided on this issue. (Note: my brother, Brian Carney, is on the editorial board of the Journal.)

The requirement that banks be able to prove ownership of mortgages by producing notes and assignments reflects a long-settled view about the necessity of written contracts in real estate transactions. Long before the founding of our Republic, England adopted what is commonly called the “Statute of Frauds.” It required that real estate conveyances be recorded in writing and signed. Similar laws apply in almost every state in the Union.

Part of the point of the writing requirement is to allow the government the transparency it needs to enforce property rights, including the right to foreclose on a home. If courts were to treat this as mere “paperwork” that was irrelevant to the cases, both property rights and the rule-of-law would suffer. It’s surprising that the Journal’s editorial page would take this stance.

Now, if the problem truly is just sloppy work on the part of robo-signers, banks can likely resume foreclosures before too long. But many suspect that the reason banks were falsifying their knowledge about the possession of loan documents is that the banks do not actually have the documents and don’t know where to find them. This could permanently impair their ability to foreclose on some properties.

What does this mean for the banks?

In the first place, the slowdown in foreclosure sales might hit the revenues of the banks. The defaulted loans aren’t spinning off revenue and now the foreclosures aren’t producing revenue either. If the foreclosure freezes last long enough, this could it the bottom lines of the banks. At the very least, banks should be adjusting the estimates on the likelihood of short-term recovery values for their mortgage portfolios.

The fact that banks securitized loans but did not get proper assignments of the mortgage notes may find themselves liable to lawsuits from investors. A typical mortgage bond issuance includes representations and warranties that all the proper documentation has been obtained. Banks could find themselves liable for a breach of these warranties.

This could also turn into a fight between investors of junior and senior tranches of mortgage bonds. Here’s how the Journal describes this fight:

When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale—the very end of the foreclosure process—the holders of the junior, or riskiest debt, would be the first investors to take losses. But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

Not surprisingly, senior debt holders want banks to foreclose faster to reduce expenses. Junior bondholders are generally happy to stretch things out. What is more, it isn't entirely clear how the costs of re-processing tens of thousands of mortgages will be allocated. Those costs could be "significant" said Andrew Sandler, a Washington, D.C., attorney who represents mortgage companies.

The most damaging thing that could happen to banks would be the discovery that they simply cannot prove they hold a mortgage on a house. In that case, the loan would probably have to be written down to near zero. Even for current loans, the regulatory reserve requirements would double as the loan would no longer be a functional mortgage but an ordinary consumer loan. Depending on the size of the “no docs” portion of the loan portfolio, this might be a minor blip or require a bank to raise new capital to fill the hole in the balance sheet.

What does this mean for the housing market and the economy?

Get ready to hear the phrase “pig through the python” a lot. For example, “We need to get the pig through the python very quickly so that the market can be free of uncertainty.”

This is the favorite metaphor of bankers discussing the foreclosure crisis. The idea is that anything that slows down foreclosures will unsteady the housing market. There’s a lot of truth to this. Buyers will hesitate to bid on foreclosure sales if they are not confident the foreclosure is legitimate. Other buyers may worry that the lack of foreclosure sales in an area is a false indicator of the health of the local housing market.

Banks concerned about the recovery values of their mortgage portfolios and higher capital requirements, may pull back lending even further than they already have. In short, this could be the beginning of the second leg of the credit crunch.

WASHINGTON (Reuters) - President Barack Obama's housing secretary said on Sunday "it's shameful" that financial institutions may have made the housing crisis worse by improperly processing foreclosures.

Shaun Donovan, secretary of the Department of Housing and Urban Development, said in a column on the Huffington Post website that a comprehensive review of the foreclosure crisis was under way and that the administration would respond with "the full force of the law where problems are found."

There have been allegations that banks failed to review foreclosure documents properly or submitted false statements when they foreclosed on properties.

In addition to inquiries by attorneys general in all 50 U.S. states, the Justice Department and banking regulators, the Securities and Exchange Commission has begun a preliminary investigation.

Federal Deposit Insurance Corp. Chairman Sheila Bair said in an interview on C-SPAN's "Newsmakers" that regulators needed to gauge the scope of the improper processing.

"We have been told that this is a process issue - that all of the information is in the file, the problem is the person who needed to sign the affidavit had not been looking at the file before they'd done so. So we need to independently verify that," Bair said.

"Foreclosure is a very serious thing and it should only being undertaken after loan modification efforts are not feasible. And that the files are fully documented."

Donovan, in his column, wrote: "The recent revelations about foreclosure processing -- that some banks may be repossessing the homes of families improperly -- has rightly outraged the American people."

"The notion that many of the very same institutions that helped cause this housing crisis may well be making it worse is not only frustrating -- it's shameful," Donovan added.

The housing secretary said investigative agencies are sending out a clear message: "Banks must follow the law -- and those that haven't should immediately fix what is wrong."

"Given the problems that have already been found and admitted to by some servicers, the Obama administration fully supports the voluntary moratoria that are already in place and others should they be deemed necessary," Donovan wrote.

"Some have suggested, however, that all foreclosures in every state, under every servicer, should be stopped. But a national, blanket moratorium on all foreclosure sales would do far more harm than good -- hurting homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales," Donovan added.

Bair also urged banks to do "rigorous internal analysis" about the range of possible risk exposures in the foreclosure crisis.

"We need to get a full handle on all of these issues," she said. "If it turns out this is just a process issue then I don't anticipate the exposures to be significant.

"If it turns out to be something more fundamental then we'll have to deal with that. But I think we need to get all the information before we jump to any conclusions."

October 16, 2010

The big bank muckety mucks, having screwed the country once and then been rewarded handsomely for it are on the verge of screwing it again. There's only one problem. The law isn't on their side this time. It seems that the law states that in order to foreclose on someone's house, you must have legal documentation that you actually own that house. Now it comes out that the banks (for they are the ones trying to foreclose) can't produce the documents. So LEGALLY they do not have the right to foreclose. Legally speaking the homeowners have a right not only to stay in their houses without fear of eviction, but they also have the right to stop making any more mortagage payments until such time that the banks can produce the proper documents, and chances are, they can't produce them. If they could, they would have done so by now instead of having robo signers sign fake and fraudulent documents. Jeez, if these guys were on the level you would think that they could do better than to hire Wal-Mart employees and other minimum wage earners with no formal training in the field to robo sign thousands of these fraudulent documents. This is what the foreclosure moratorium is all about.

But the deeper issue is that the banks don't possess the correct documents, and they were never recorded with local counties. Therefore, for all their fancy schmancy CDOs, credit default swaps, tranches, derivatives and every other form of high blown finance, the banks don't actually and legally own the houses they are trying to foreclose on. Now if you accept that this is true, what it means is that these large banks will again fail and expect the taxpayers to bail them out. This is a bridge the Obama administration does not want to cross. Nor does it want to cross the bridge of the spectacle of having all these large denizens of Wall Street actually fail after they have been bailed out once. It is a huge embarassment not only to capitalism but to the US version of it. To put it mildly the US is up a creek without a paddle. On the one hand it can subvert the law and say, what the hell, we don't care if the banks have the proper legal documentation, let the banks screw the homeowners anyway. Because how else to maintain order and sanity in the banking system? We just can't have another meltdown, can we. On the other hand, if the Obama administration and the legal system is consistent with itself and maintains the law in the interests of justice and the property rights of the aggrieved homeowners, the whole damn edifice of the banking system goes kerplop. Talk about moral hazard and the ultimate Greek tragedy.

The only ethical way out of this morass is for the government to honor the Kanjorsky amendment to the financial reform bill that slipped past the lobbyists' notice and allows the government to step in. The Kanjorski amendment allows federal regulators to preemptively break up large financial institutions that pose a threat to US financial or economic stability. And this situation poses a definite risk to US financial and economic stability. Homeowners are not going to allow themselves to be screwed (again) just to maintain the big banks in their current positions, massive bonuses and all. They're going to sue the bastards and they're already doing it. Why do you think there's a foreclosure moratorium?

The Obama administration has sided with the big banks every step of the way so far, bailing them out without cracking down and then letting them go on feathering their own nests in a gargantuan display of financial gluttony. Now the banks are caught with their pants down (again), and this time the law is clearly on the side not of the banks but of the homeowners. They have even foreclosed on people who were paid up on their mortgage and at least in one case foreclosed on a person who didn't even have a mortgage! How would you like to be evicted from your home even when you owned it free and clear. It happened!

The Obama administration's plan for mortgage modification either by reducing principal or interest rate never went anywhere and was never actually put into effect by the banks. The banks thought it to be more profitable for them to go ahead and foreclose on everything they could get their hands on. Homeowners be damned! The banks got themselves into this mess because they wanted to bypass paying local recording fees. So they are totally culpable of wallowing in their own greed. Now let them wallow in their own puke. They deserve it. The homeowners, finally, and not the banks deserve a break. It's almost unimaginable that after the mess they created, the banks are at it again creating another mess. Although the first mess was created legally after the Glass-Steagall Act was nullified in 1999 by the Financial Modernization Act, the present mess does not have any legal backing whatsoever. Legally, the banking greed gluttons are clearly on the hook, but how much do you want to bet that they will try to weasle out of this one. Let us hope that the Obama administration comes to its senses and says to the banks: Enough! No more! We've been screwed once. We're not letting it happen again. It's the only morally right thing to do!

American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the U.S. model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were “well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement.” By implication, these were things the Asians lacked but we had.

We didn’t.

The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.

The story so far: An epic housing bust and sustained high unemployment have led to an epidemic of default, with millions of homeowners falling behind on mortgage payments. So servicers — the companies that collect payments on behalf of mortgage owners — have been foreclosing on many mortgages, seizing many homes.

But do they actually have the right to seize these homes? Horror stories have been proliferating, like the case of the Florida man whose home was taken even though he had no mortgage. More significantly, certain players have been ignoring the law. Courts have been approving foreclosures without requiring that mortgage servicers produce appropriate documentation; instead, they have relied on affidavits asserting that the papers are in order. And these affidavits were often produced by “robo-signers,” or low-level employees who had no idea whether their assertions were true.

Now an awful truth is becoming apparent: In many cases, the documentation doesn’t exist. In the frenzy of the bubble, much home lending was undertaken by fly-by-night companies trying to generate as much volume as possible. These loans were sold off to mortgage “trusts,” which, in turn, sliced and diced them into mortgage-backed securities. The trusts were legally required to obtain and hold the mortgage notes that specified the borrowers’ obligations. But it’s now apparent that such niceties were frequently neglected. And this means that many of the foreclosures now taking place are, in fact, illegal.

This is very, very bad. For one thing, it’s a near certainty that significant numbers of borrowers are being defrauded — charged fees they don’t actually owe, declared in default when, by the terms of their loan agreements, they aren’t.

Beyond that, if trusts can’t produce proof that they actually own the mortgages against which they have been selling claims, the sponsors of these trusts will face lawsuits from investors who bought these claims — claims that are now, in many cases, worth only a small fraction of their face value.

And who are these sponsors? Major financial institutions — the same institutions supposedly rescued by government programs last year. So the mortgage mess threatens to produce another financial crisis.

What can be done?

True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?

The response from the right is, however, even worse. Republicans in Congress are lying low, but conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.

What should be happening? The excesses of the bubble years have created a legal morass, in which property rights are ill defined because nobody has proper documentation. And where no clear property rights exist, it’s the government’s job to create them.

That won’t be easy, but there are good ideas out there. For example, the Center for American Progress has proposed giving mortgage counselors and other public entities the power to modify troubled loans directly, with their judgment standing unless appealed by the mortgage servicer. This would do a lot to clarify matters and help extract us from the morass.

One thing is for sure: What we’re doing now isn’t working. And pretending that things are O.K. won’t convince anyone.

The Titanic that is the U.S. housing market has just sprung its biggest leak, and even some of the largest banks responsible for this mess, like Bank of America and JPMorgan Chase, are now imposing a temporary moratorium on foreclosures. They have done so very reluctantly and only after courts throughout the nation, and the attorneys general of 40 states, questioned the legality of a securitized system of homeownership that has impoverished tens of millions.

How do you foreclose on a home when you can’t figure out who owns it because the original mortgage is part of a derivatives package that has been sliced and diced so many ways that its legal ownership is often unrecognizable? You cannot get much help from those who signed off on the process because they turn out to be robot signers acting on automatic pilot. Fully 65 million homes in question are tied to a computerized program, the national Mortgage Electronic Registration Systems (MERS), that is often identified in foreclosure proceedings as the owner of record.

MERS was the result of a partnership formed back during the Clinton years between Fannie Mae, an ostensibly government-sponsored agency that morphed into a very much for-profit mega-Wall Street hustler, and Countrywide, the largest and most rapacious of the private mortgage marketers. The scam of computerized credit approval and mortgage certification they came up with was subsequently embraced by Freddie Mac, the other huge housing agency, and the leading Wall Street banks joined in the feeding frenzy. MERS owners now include Wells Fargo, AIG, GMAC, Citigroup, HSBC, the two housing agencies and Bank of America. But the courts are increasingly challenging MERS claims to the right of foreclosure since this whole racket, which bypasses the power of counties to register property ownership, was never authorized in the law.

Yet the White House on Tuesday once again manifested an indifference to the suffering of victimized homeowners when press secretary Robert Gibbs warned of the “unintended consequences to a broader moratorium.” Which presumably would be worse in his view than the intended consequence of evicting people from their homes, which has already affected some 20 million Americans and threatens many more. What arrogance for an administration featuring Timothy Geithner and Lawrence Summers, who created this mess back in the Clinton era, to evidence such slight compassion for the victims of their folly.

The disastrous disarray in the housing industry is a direct result of decisions taken during the deregulation frenzy of the Clinton presidency when the securitization of mortgage and other debts was removed from any regulatory supervision. Instead of mortgages being between customers and banks and then being properly recorded by local government agencies, they became poker chips in the Wall Street casino. Tens of millions of home mortgages were recklessly issued with scant reference to their true values and bundled into securities to be sold on the unregulated derivatives market. But in order for there to be sufficient fluidity in the rapid-fire swapping of stock bundles of individual homes, those mortgages had to be unhinged from the valid legal restraints that had governed their issuance throughout most of human history.

To engage in the recklessness of turning people’s homes—their castles and nest eggs—into playthings of Wall Street market hustlers, or securitization of the assets, as it was termed, homeownership record-keeping had to be mangled beyond recognition. Throughout the preceding centuries of this nation’s history, the origination of housing loans was between the homebuyer and a lender, both of whom expected to be connected through decades of payments. Until the nuttiness that began in the 1990s when homes became ciphers in a marketable security, the verification of homeownership was a straightforward transaction dutifully recorded by local county governments. If the house was sold, the physical records were changed and available for all to see.

But that didn’t suit the newfangled collateralized debt obligations based on collections of mortgages to be cut in tranches as to their expected risk and sold as securities in an unregulated futures market. To facilitate the scam, the records of homeownership came to be largely maintained without the traditional local paper trail in a new computerized national database. The ensuing difficulty in tracing such ownership is now at the heart of the courts’ objections and the compelling argument for a government-enforced national moratorium on home foreclosures to provide sufficient time to sort this mess out.

With risky behavior by big finance again threatening economic stability, how can we get things right this time?

by Ellen Brown

Looming losses from the mortgage scandal dubbed "foreclosuregate" may qualify as the sort of systemic risk that, under the new financial reform bill, warrants the breakup of the too-big-to-fail banks. The Kanjorski amendment allows federal regulators to pre-emptively break up large financial institutions that-for any reason-pose a threat to U.S. financial or economic stability.

The Kanjorski amendment-which slipped past lobbyists largely unnoticed-allows federal regulators to preemptively break up large financial institutions that pose a threat to U.S. financial or economic stability. If the current foreclosure scandal doesn't qualify, what would? (Graphic: ABC news)

Although downplayed by most media accounts and popular financial analysts, crippling bank losses from foreclosure flaws appear to be imminent and unavoidable. The defects prompting the "RoboSigning Scandal" are not mere technicalities but are inherent to the securitization process. They cannot be cured. This deep-seated fraud is already explicitly outlined in publicly available lawsuits.

There is, however, no need to panic, no need for TARP II, and no need for legislation to further conceal the fraud and push the inevitable failure of the too-big-to-fail banks into the future.

Federal regulators now have the tools to take control and set things right. The Wall Street giants escaped the Volcker Rule, which would have limited their size, and the Brown-Kaufman amendment, which would have broken up the largest six banks outright; but the financial reform bill has us covered. The Kanjorski amendment-which slipped past lobbyists largely unnoticed-allows federal regulators to preemptively break up large financial institutions that pose a threat to U.S. financial or economic stability.

Rep. Grayson's Call for a Moratorium

The new Financial Stability Oversight Council (FSOC) probably didn't expect to have its authority called on quite so soon, but Rep. Alan Grayson (D-FL) has just put the amendment to the test. On October 7, in a letter addressed to Timothy Geithner, Shiela Bair, Ben Bernanke, Mary Schapiro, John Walsh (Acting Comptroller of the Currency), Gary Gensler, Ed DeMarco, and Debbie Matz (National Credit Union Administration), he asked for an emergency task force on foreclosure fraud. He said:

The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks. More importantly, these foreclosures are devastating neighborhoods, families, and cities all over the country. Each foreclosure costs tens of thousands of dollars to a municipality, lowers property values, and makes bank failures more likely.

Grayson sought a foreclosure moratorium on all mortgages originated and securitized between 2005-2008, until such time as the FSOC task force was able to understand and mitigate the systemic risk posed by the foreclosure fraud crisis. But on Sunday, White House adviser David Axelrod downplayed the need for a national foreclosure moratorium, saying the Administration was pressing lenders to accelerate their reviews of foreclosures to determine which ones have flawed documentation. "Our hope is this moves rapidly and that this gets unwound very, very quickly," he said.

According to Brian Moynihan, chief executive of Bank of America, "The amount of work required is a matter of a few weeks. A few weeks we'll be through the process of double checking the pieces of paper we need to double check."

"Absurd," say critics such as Max Gardner III of Shelby, North Carolina. Gardner is considered one of the country's top consumer bankruptcy attorneys. "This is not an oops. This is not a technical problem. This is not even sloppiness," he says. The problem is endemic, and its effects will be felt for years.

Rep. Grayson makes similar allegations. He writes:

The banks didn't keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.

There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts. The result of this is foreclosure fraud on a massive scale, including foreclosures on people without mortgages or who are on time with their payments. [Emphasis added.]

Why Wasn't It Done Right in the First Place?

That raises the question, why were the notes not assigned? Grayson says the banks were not interested in repayment; they were just churning loans as fast as they could in order to generate fees. Financial blogger Karl Denninger says, "I believe a big part of why it was not done is that if it had been done the original paperwork would have been available to the trustee and ultimately the MBS owners, who would have immediately discovered that the representations and warranties as to the quality of the conveyed paper were being wantonly violated." He says, "You can't audit what you don't have."

Both are probably right, yet these explanations seem insufficient. If it were just a matter of negligence or covering up dubious collateral, surely some of the assignments by some of the banks would have been done properly. Why would they all be defective?

The reason the mortgage notes were never assigned may be that there was no party legally capable of accepting the assignments. Securitization was originally set up as a tax dodge; and to qualify for the tax exemption, the conduits between the original lender and the investors could own nothing. The conduits are "special purpose vehicles" set up by the banks, a form of Mortgage Backed Security called REMICs (Real Estate Mortgage Investment Conduits). They hold commercial and residential mortgages in trust for the investors. They don't own them; they are just trustees.

The problem was nailed in a class action lawsuit recently filed in Kentucky, titled Foster v. MERS, GMAC, et al. (USDC, Western District of Kentucky). The suit claims that MERS and the banks violated the Racketeer Influenced and Corrupt Organizations Act, a law originally passed to pursue organized crime. Bloomberg quotes Heather Boone McKeever, a Lexington, Ky.-based lawyer for the homeowners, who said in a phone interview, "RICO comes in because the fraud didn't just happen piecemeal. This is organized crime by people in suits, but it is still organized crime. They created a very thorough plan."

The complaint alleges:

53. The "Trusts" coming to Court are actually Mortgage Backed Securities ("MBS"). The Servicers, like GMAC, are merely administrative entities which collect the mortgage payments and escrow funds. The MBS have signed themselves up under oath with the Securities and Exchange Commission ("SEC,") and the Internal Revenue Service ("IRS,") as mortgage asset "pass through" entities wherein they can never own the mortgage loan assets in the MBS. This allows them to qualify as a Real Estate Mortgage Investment Conduit ("REMIC") rather than an ordinary Real Estate Investment Trust ("REIT"). As long as the MBS is a qualified REMIC, no income tax will be charged to the MBS. For purposes of this action, "Trust" and MBS are interchangeable. . . .

56. REMICS were newly invented in 1987 as a tax avoidance measure by Investment Banks. To file as a REMIC, and in order to avoid one hundred percent (100%) taxation by the IRS and the Kentucky Revenue Cabinet, an MBS REMIC could not engage in any prohibited action. The "Trustee" can not own the assets of the REMIC. A REMIC Trustee could never claim it owned a mortgage loan. Hence, it can never be the owner of a mortgage loan.

57. Additionally, and important to the issues presented with this particular action, is the fact that in order to keep its tax status and to fund the "Trust" and legally collect money from investors, who bought into the REMIC, the "Trustee" or the more properly named, Custodian of the REMIC, had to have possession of ALL the original blue ink Promissory Notes and original allonges and assignments of the Notes, showing a complete paper chain of title.

58. Most importantly for this action, the "Trustee"/Custodian MUST have the mortgages recorded in the investors name as the beneficiaries of a MBS in the year the MBS "closed." [Emphasis added.]

Only the beneficiaries-the investors who advanced the funds-can claim ownership. And the mortgages had to have been recorded in the name of the beneficiaries the year the MBS closed. The problem is, who ARE the beneficiaries who advanced the funds? In the securitization market, they come and go. Properties get sold and resold daily. They can be sliced up and sold to multiple investors at the same time. Which investors could be said to have put up the money for a particular home that goes into foreclosure? MBS are divided into "tranches" according to level of risk, typically from AAA to BBB. The BBB investors take the first losses, on up to the AAAs. But when the REMIC is set up, no one knows which homes will default first. The losses are taken collectively by the pool as they hit; the BBBs simply don't get paid. But the "pool" is the trust; and to qualify as a REMIC trust, it can own nothing.

The lenders were trying to have it both ways; and to conceal what was going on, they dropped an electronic curtain over their sleight of hand, called Mortgage Electronic Registration Systems or "MERS." MERS is simply an electronic data base. On its website and in assorted court pleadings, it too declares that it owns nothing. It was set up that way so that it would be "bankruptcy-remote," something required by the credit rating agencies in order to turn the mortgages passing through it into highly rated securities that could be sold to investors. According to the MERS website, it was also set up that way to save on recording fees, which means dodging state statutes requiring a fee to be paid to establish a formal record each time title changes hands.

The arrangement satisfied the ratings agencies, but it has not satisfied the courts. Real estate law dating back hundreds of years requires that to foreclose on real property, the foreclosing party must produce signed documentation establishing a chain of title to the property; and that has not been done. Increasingly, judges are holding that if MERS owns nothing, it cannot foreclose, and it cannot convey title by assignment so that the trustee for the investors can foreclose. MERS breaks the chain of title so that no one has standing to foreclose.

Sixty-two million mortgages are now held in the name of MERS, a ploy that the banks have realized won't work; so Plan B has been to try to fabricate documents to cure the defect. Enter the RoboSigners, a small group of people signing thousands of documents a month, admittedly without knowing what was in them. Interestingly, it wasn't just one bank engaging in this pattern of coverup and fraud but many banks, suggesting the sort of "organized crime" that would qualify under the RICO statute.

However, that ploy won't work either, because it's too late to assign properties to trusts that have already been set up without violating the tax code for REMICs, and the trusts themselves aren't allowed to own anything under the tax code. If the trusts violate the tax laws, the banks setting them up will owe millions of dollars in back taxes. Whether the banks are out the real estate or the taxes, they could well be looking at insolvency, posing the sort of serious systemic risk that would bring them under the purview of the new Financial Stability Oversight Council.

No need for disaster

As comedian Jon Stewart said in an insightful segment called "Foreclosure Crisis" on October 7, "We're back to square one." While we're working it all out, an extended foreclosure moratorium probably is in the works. But this needn't be the economic disaster that some are predicting - not if the FSOC is allowed to do its job. We've been here before, and not just in 2008.

In 1934, Congress enacted the Frazier-Lemke Farm Bankruptcy Act to enable the nation's debt-ridden farmers to scale down their mortgages. The act delayed foreclosure of a bankrupt farmer's property for five years, during which time the farmer made rental payments. The farmer could then buy back the property at its currently appraised value over six years at 1 percent interest, or remain in possession as a paying tenant. Interestingly, according to Marian McKenna in Franklin Roosevelt and the Great Constitutional War (2002), "The federal government was empowered to buy up farm mortgages and issue non-interest-bearing treasury notes in exchange." Non-interest-bearing treasury notes are what President Lincoln issued during the Civil War, when they were called "Greenbacks."

The 1934 Act was subsequently challenged by secured creditors as violating the Fifth Amendment's due process guarantee of just compensation, a fundamental right of mortgage holders. (Note that this would probably not be a valid challenge today, since there don't seem to be legitimate mortgage holders in these securitization cases. There are just investors with unsecured claims for relief in equity for money damages.) The Supreme Court voided the 1934 Act, and Congress responded with the "Farm Mortgage Moratorium Act" in 1935. The terms were modified, limiting the moratorium to a three-year period, and the revision gave secured creditors the opportunity to force a public sale, with the proviso that the farmer could redeem the property by paying the sale amount. The act was renewed four times until 1949, when it expired. During the 15 years the act was in place, farm prices stabilized and the economy took off, retooling it for its role as a global industrial power during the remainder of the century.

We've come full circle again. We didn't get it right in 2008, but with the newly empowered Financial Stability Oversight Council, we already have the ready-made vehicle to avoid another taxpayer bailout, and to put too-big-to-fail behind us as well.

Millions of homes have been seized by banks during the economic crisis through a mass production system of foreclosures that was set up to prioritize one thing over everything else: speed.

With 2 million homes in foreclosure and another 2.3 million seriously delinquent on their mortgages - the biggest logjam of distressed properties the market has ever seen - companies involved in the foreclosure process were paid to move cases quickly through the pipeline.

Law firms competed with one another to file the largest number of foreclosures on behalf of lenders - and were rewarded for their work with bonuses. These and other companies that handled the preparation of documents were paid for volume, so they processed as many as they could en masse, leaving little time to read the paperwork and catch errors.

And the big mortgage companies overseeing it all - including government-owned Fannie Mae - were so eager to get bad loans off their books that they imposed a penalty on contractors if they moved too slowly.

The system was so automated and so inflexible that once a foreclosure process began, homeowners and consumer advocates say, there was often no way to stop it.

"The problem is when you try to fight back against this machine, well, it's a machine," said Michael Alex Wasylik, an attorney for homeowners in Dade City, Fla. "You have to be able to get your case off the mass production line and to someone who will take the time to read what they file, but in many mortgage firms that person doesn't exist."

The financial incentives show that the problems plaguing the foreclosure process extend well beyond a few, low-ranking document processors who forged documents or failed to review foreclosure files even as they signed off on them. In fact, virtually everyone involved - loan servicers, law firms, document processing companies and others - made more money as they evicted more borrowers from their homes, creating a system that was vulnerable to error and difficult for homeowners to challenge.

"This was a systemic problem. It's not like a few renegade employees made mistakes," said lawyer Peter Ticktin, who defends Florida homeowners facing foreclosure. "It was industry-wide and pervasive, and everyone knew about it."

$1,300 per case

The law firm of David J. Stern in Plantation, Fla., for instance, assigned a team of 12 to handle 12,000 foreclosure files at once for big financial companies such as Fannie Mae, Freddie Mac and Citigroup, according to court documents. Each time a case was processed without a challenge from the homeowner, the firm was paid $1,300. It was an unusual arrangement in a legal profession that normally charges by the hour.

The office was so overwhelmed with work that managers kept notary stamps lying around for anyone to use. Bosses would often scream at each other in daily meetings for "files not moving fast enough," Tammie Lou Kapusta, the senior paralegal in charge of the operation, said in a deposition Sept. 22 for state law enforcement officials who are conducting a fraud investigation into the firm. In 2009 alone, Stern's law firm handled over 70,000 foreclosures.

"The girls would come out on the floor not knowing what they were doing," Kapusta said. "Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents."

Fannie Mae, Freddie Mac and Citigroup said they no longer do new business with Stern's firm.

Law firms were rewarded with additional bonuses from document processing companies if they met deadlines for preparing and filing foreclosures in courts. One of the nation's major processors, Lending Processing Services in Jacksonville, Fla., confirmed that it had paid such bonuses but said it no longer offers them. The company is under investigation by federal and state law enforcement.

Meanwhile, Fannie Mae imposes a $100 fee on contractors for each day they fail to notify the firm that the foreclosure process was a success and that it has the right to move ahead with the resale of a home. On top of that, Fannie charges a penalty - which escalates for larger mortgages - on contractors who delay selling off such properties.

Fannie declined to comment on these fees. But in a memo to loan servicers dated Aug. 31, Gwen Muse-Evans, Fannie Mae's chief risk officer, warned mortgage servicers that fees may be imposed based on "the length of the delay and any costs that are directly attributable to the delay."

Speed is also rewarded by the nation's credit-rating agencies, which give higher grades to mortgage service firms that accelerate the foreclosure process and generally hand out lower grades to those who hold onto delinquent loans. A Fitch Ratings manual calls the speed of foreclosures "the key driver in the servicer rating," according to a report by the National Consumer Law Center.

Untrained hires

To keep up with the crush of foreclosures, document processors and mortgage service firms rushed to hire anyone they could - hair stylists, Wal-Mart clerks, assembly-line workers who made blinds - and gave them key roles in their foreclosure departments without formal training, according to court papers.

A number of these employees have testified that they did not really know what a mortgage was, couldn't define "affidavit," and knew they were lying when they signed documents related to foreclosures, according to depositions of 150 employees for mortgage companies taken by the law firm run by Ticktin, the Florida lawyer.

These problems were compounded as banks began to rely more heavily on computer systems to quickly move people through the foreclosure process. That automation came at a price for the homeowners who had difficulty fighting incorrect decisions by inexperienced, anonymous employees who took what was in the computer as fact even when homeowners said there were data-entry errors.

"These guys were caught off-guard with the onslaught of foreclosures," said Clifford Rossi, a former chief risk officer for consumer lending for Citigroup who now teaches at the business school at the University of Maryland. "So there were a lot of errors."

In one case in Fort Lauderdale in July, for instance, Bank of America foreclosed on a man after a computer glitch and resold his home even though he had paid his mortgage in full.

Homeowners and their attorneys say the automated system especially hurts borrowers who may qualify for loan modifications through federal rescue programs.

Chandra Anand, 59, a telecommunications consultant from Germantown, called his lender in the fall of 2008, before he missed any payments, to warn the company that his wife's open-heart surgery might cause the family financial difficulty. He was told that in order to qualify for a loan modification he needed to miss payments. So he did and applied for a modification. He never heard back from his lender until he got a foreclosure notice in January 2009.

Every time he calls his lender to resolve his situation, an official tells him "to be patient, that it could take 60 more days to review things," Anand said. "It's now been a year and a half."

Andrea Bopp Stark, a lawyer with the Molleur Law Office in Biddeford, Maine, said that a number of her clients should be eligible for loan modifications through a Treasury Department program but that servicers "are in such a state of disarray that they often can't give homeowners basic answers about the state of their loan modification request."

Then a few weeks or months later, the same servicers evict homeowners as if those applications were never filed.

October 13, 2010

At JPMorgan Chase & Company, they were derided as “Burger King kids” — walk-in hires who were so inexperienced they barely knew what a mortgage was.

At Citigroup and GMAC, dotting the i’s and crossing the t’s on home foreclosures was outsourced to frazzled workers who sometimes tossed the paperwork into the garbage.

And at Litton Loan Servicing, an arm of Goldman Sachs, employees processed foreclosure documents so quickly that they barely had time to see what they were signing.

“I don’t know the ins and outs of the loan,” a Litton employee said in a deposition last year. “I’m not a loan officer.”

As the furor grows over lenders’ efforts to sidestep legal rules in their zeal to reclaim homes from delinquent borrowers, these and other banks insist that they have been overwhelmed by the housing collapse.

But interviews with bank employees, executives and federal regulators suggest that this mess was years in the making and came as little surprise to industry insiders and government officials. The issue gained new urgency on Wednesday, when all 50 state attorneys general announced that they would investigate foreclosure practices. That news came on the same day that JPMorgan Chase acknowledged that it had not used the nation’s largest electronic mortgage tracking system, MERS, since 2008.

That system has been faulted for losing documents and other sloppy practices.

The root of today’s problems goes back to the boom years, when home prices were soaring and banks pursued profit while paying less attention to the business of mortgage servicing, or collecting and processing monthly payments from homeowners.

Banks spent billions of dollars in the good times to build vast mortgage machines that made new loans, bundled them into securities and sold those investments worldwide. Lowly servicing became an afterthought. Even after the housing bubble began to burst, many of these operations languished with inadequate staffing and outmoded technology, despite warnings from regulators.

When borrowers began to default in droves, banks found themselves in a never-ending game of catch-up, unable to devote enough manpower to modify, or ease the terms of, loans to millions of customers on the verge of losing their homes. Now banks are ill-equipped to deal the foreclosure process.

“We waited and waited and waited for wide-scale loan modifications,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation, one of the first government officials to call on the industry to take action. “They never owned up to all the problems leading to the mortgage crisis. They have always downplayed it.”

In recent weeks, revelations that mortgage servicers failed to accurately document the seizure and sale of tens of thousands of homes have caused a public uproar and prompted lenders like Bank of America, JPMorgan Chase and Ally Bank, which is owned by GMAC, to halt foreclosures in many states.

Even before the political outcry, many of the banks shifted employees into their mortgage servicing units and beefed up hiring. Wells Fargo, for instance, has nearly doubled the number of workers in its mortgage modification unit over the last year, to about 17,000, while Citigroup added some 2,000 employees since 2007, bringing the total to 5,000.

“We believe we responded appropriately to staff up to meet the increased volume,” said Mark Rodgers, a spokesman for Citigroup.

Some industry executives add that they’re committed to helping homeowners but concede they were slow to ramp up. “In hindsight, we were all slow to jump on the issue,” said Michael J. Heid, co-president of at Wells Fargo Home Mortgage. “When you think about what it costs to add 10,000 people, that is a substantial investment in time and money along with the computers, training and system changes involved.”

Other officials say as foreclosures were beginning to spike as early as 2007, no one could have imagined how rapidly they would reach their current level. About 11.5 percent of borrowers are in default today, up from 5.7 percent from two years earlier.

“The systems were not ever that great to begin with, but you didn’t have that much strain on them,” said Jim Miller, who previously oversaw the mortgage servicing units for troubled borrowers at Citigroup, Chase and Capitol One. “I don’t think anybody anticipated this thing getting as bad as it did.”

Almost overnight, what had been a factorylike business that relied on workers with high school educations to process monthly payments needed to come up with a custom-made operation that could solve the problems of individual homeowners. Gregory Hebner, the president of the MOS Group, a California loan modification company that works closely with service companies, likened it to transforming McDonald’s into a gourmet eatery. “You are already in chase mode, and you never catch up,” he said.

To make matters worse, the banks had few financial incentives to invest in their servicing operations, several former executives said. A mortgage generates an annual fee equal to only about 0.25 percent of the loan’s total value, or about $500 a year on a typical $200,000 mortgage. That revenue evaporates once a loan becomes delinquent, while the cost of a foreclosure can easily reach $2,500 and devour the meager profits generated from handling healthy loans.

“Investment in people, training, and technology — all that costs them a lot of money, and they have no incentive to staff up,” said Taj Bindra, who oversaw Washington Mutual’s large mortgage servicing unit from 2004 to 2006.

And even when banks did begin hiring to deal with the avalanche of defaults, they often turned to workers with minimal qualifications or work experience, employees a former JPMorgan executive characterized as the “Burger King kids.” In many cases, the banks outsourced their foreclosure operations to law firms like that of David J. Stern, of Florida, which served clients like Citigroup, GMAC and others. Mr. Stern hired outsourcing firms in Guam and the Philippines to help.

The result was chaos, said Tammie Lou Kapusta, a former employee of Mr. Stern’s who was deposed by the Florida attorney general’s office last month. “The girls would come out on the floor not knowing what they were doing,” she said. “Mortgages would get placed in different files. They would get thrown out. There was just no real organization when it came to the original documents.”

Citigroup and GMAC say they are no longer giving any new work to Mr. Stern’s firm.

In some cases, even steps that were supposed to ease the situation, like the federal program aimed at helping homeowners modify their mortgages to reduce what they owed, had actually contributed to the mess. Loan servicing companies complain that bureaucratic requirements are constantly changed by Washington, forcing them to overhaul an already byzantine process that involves nearly 250 steps.